Three Years Of Modi Government: The Global Business View
Assessing the government’s record on trade deals, FDI, regulatory consistency & domestic deregulation.
As India’s Prime Minister Narendra Modi crosses the three-year mark in office, judging by the criteria arguably most important to him — winning state elections and solidifying the Bharatiya Janata Party’s position atop Indian politics — his tenure has been quite successful. There is plenty of terrific analysis on how Modi has fared as an economic reformer. Meanwhile, foreign businesses engaging with India for either trade or investment have a slightly different set of criteria. Market access becomes the top priority, with domestic regulatory stability coming closely behind. The Modi government has a mixed record on both fronts. But real progress, mixed with India’s relative economic success in recent years, and a bit of luck has led to increased foreign investment and lower trade deficits.
The international business community had very high hopes from the Modi government, based on his pro-business track record as chief minister of Gujarat. However, as it often is, “beauty is in the eye of the beholder.” Business leaders could have held four types of views on what being an “economic reformer” means.
- To some executives, it meant pushing for robust trade liberalisation through significant trade agreements.
- To others, it meant removing the remaining restrictions governing foreign investment.
- A third group was looking for regulatory consistency to allow better business planning.
- A fourth group wanted domestic deregulation as a means to make the market work, and reducing the inherent advantages to domestic competitors that were more easily able to navigate byzantine rules.
Disappointment On Free Trade
The first group, “free traders,” have been dissapointed. One of the Modi government’s first international policy decisions was to ratify the World Trade Organization’s “Trade in Services Agreement.” But India deferred, demanding a new carve-out for agriculture subsidies, delaying global approval of the deal. India’s revised model Bilateral Investment Treaty (BIT) is a poorly-conceived attempt to gut the very reasons foreign investors would care to have a BIT in place, for cover. India has not shown interest in revisiting previous positions against the plurilateral trade agreements being negotiated by WTO members covering services, environmental goods, or information technology products.
- India’s free trade agreement (FTA) talks with the European Union remain stalled.
- Australia has put its pending FTA talks with India on hold.
- Other members of the Regional Comprehensive Economic Partnership (RCEP) are pointing fingers towards India for the slow pace of talks.
There are compelling reasons behind India’s reluctant position on trade — most significantly, the country’s goods trade deficit — particularly with China.
Top Speed On FDI Reform
The second group, “FDI liberalisers,” have seen their high expectations met or exceeded. The Modi government has moved with unprecedented speed in liberalisation of foreign investment restrictions — more than thirty foreign investment regulations have been eased in 3 years — either by increasing the FDI cap, moving the approval process to the “Automatic Route,” or relaxing onerous sub-rules governing foreign-owned firms in India. Apart from changes to foreign equity restrictions, Prime Minister Modi has personally aggressively courted of foreign firms.
Past notions of inviting investment by foreign firms as tantamount to a new “British East India Company” have been thrown out the window.
He’s comfortable sitting on stage with foreign CEOs during his foreign visits, makes time to meet business leaders visiting New Delhi, and has an emerging track record of directly facilitating key approvals that have unlocked major investments.
Skeptical Of Regulatory Consistency
The third group, “regulatory consistency” advocates, are becoming increasingly skeptical of the Modi government. The old adage, “capital is coward,” is certainly applicable to India. The concept of holding a transparent process for framing new regulations, while increasing them, remains an undependable model for the business community.
Regulators and government agencies still view the business community with suspicion; business leaders have little confidence that their responses to draft regulations get an open-minded hearing.
When looking at new regulations, there is very little consideration paid to the potential impact on the business community. This includes price controls — which have been on the rise — across a range of sectors like medical stents, pharmaceuticals, and airline tickets to smaller cities. But there has been real progress in terms of reducing the range of cross-border tax issues that had become a major concern to foreign investors in the years prior to the 2014 election.
Domestic Deregulation: No Quick Fixes
The fourth group, executives watching for “domestic deregulation,” have some reason for optimism, though the hurdles to major deregulation are daunting, and there are no “quick fixes.” And much of the deregulation in terms of reducing the number of licenses, reducing license clearance times, etc, must come from India’s progressive chief ministers. National reforms like the introduction of the Goods and Services Tax, the “Hydrocarbon Exploration Licensing Policy (HELP),” relaxing price controls on hydrocarbon fuels, coal sector reforms, and self-certification of some business license conditions give confidence that the Indian market is becoming easier to navigate.
More than two years ago, CSIS wanted to offer an impartial reform index. We created our ‘India Reforms Scorecard’ to begin monitoring progress on the reform agenda, looking at the 30 most significant reforms pending on the day Mr. Modi took office.
Considering the hurdles to reform, including the BJP’s relatively weak position in the Rajya Sabha and the party’s own inclination to focus on social issues, this is a fairly robust reform record. And it does not include things like “introduction of the GST,” which is not yet in place, or the Insurance Act amendments, since the new foreign equity cap still does not allow majority foreign ownership.
There are multiple lenses through which foreign executives judge Modi’s credentials as a reformer, and each lens provides a different view of progress. Ultimately, what really matters is whether these moves lead to an increase in foreign investment and trade. On the first score, FDI inflows, India is hovering around a historic pace. In the last 12 months alone, India has attracted nearly $45 billion in fresh FDI inflows, as per the Reserve Bank of India (RBI). This is reflective of India’s reforms, future expectations, and India’s relatively solid economic position compared to other key emerging markets.
On the trade side, India has reduced its trade deficit for consecutive years for the first time since the 1991 reforms were triggered.
This is due largely to lower oil prices, so this positive trend could reverse itself quickly irrespective of what policy choices India makes.
With the BJP expanding power across India and increasing its seat total in the Rajya Sabha, the global business community retains high expectations for India’s reform program under Prime Minister Modi. The BJP’s victory in the recent Uttar Pradesh state election has increased confidence that India will have national political stability beyond 2019. The direction of reform, however, is likely to remain the same — courting foreign investment, shying away from trade integration, and incremental improvements in both regulatory consistency, and domestic deregulation. Absent other strong markets, this will likely be sufficient for India to remain a top global business destination.
Richard Rossow is the Wadhwani Chair in U.S. India Policy Studies at The Center for Strategic and International Studies in Washington D.C.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.