JOIN USChina’s economy is slowing. Brazil is struggling as commodity prices plunge. Russia, facing Western sanctions and weak oil revenue, is headed into a recession. As other big developing markets stumble, India is emerging as one of the few hopes for global growth.
The stock market and rupee are surging. Multinational companies are looking to expand their Indian operations or start new ones. The growth in India’s economy, long a laggard, just matched China’s pace in recent months. India is riding high on the early success of Prime Minister Narendra Modi and a raft of new business-friendly policies instituted in his first eight months.
Small factories no longer need to shut down every year for government inspectors to spend a day checking boilers. Foreign investment rules have been relaxed for insurers, military contractors and real estate companies. A broad tax overhaul is underway.
Renewed optimism from outside investors is spurring business expansion in cities around the country like Tiruppur, a hub of India’s yarn and textile industry. “Most of the factories in Tiruppur are doubling or tripling their capacity, and these are huge factories,” said Pritam Sanghai, the director of Arjay Apparel Industries.
Whether India’s momentum is short-lived or sustainable hinges on whether Modi can push through deeper reforms, including addressing the persistent poverty and corruption that plague the economy. Lacking the necessary political support to overhaul legislation quickly, he has largely relied on temporary measures to make changes.
His party lost badly in recent local elections in Delhi. The next test comes on Saturday. The government is set to present its full-year Budget to parliament and lay out an agenda for taming chronic deficits while increasing investment, bolstering manufacturing and building modern highways and ports.
India, in part, is benefiting from favourable economic winds, the same ones wreaking havoc in Russia, Venezuela and elsewhere. The country’s reliance on imported oil, for example, has been its bane for decades. By last summer, oil was a $100 billion drag on the economy, roughly 5 per cent of the entire country’s economic output. With crude prices now halved, fuel costs for trucks and cars have plunged, pulling down transport expenses and inflation. The cost of government fuel subsidies has nose-dived, helping curb the country’s chronic budget deficits.
“We’ve got essentially a $50 billion gift for the economy,” said Raghuram Rajan, the governor of the Reserve Bank of India.
India is also profiting from the troubles of other emerging markets. China’s investigations of multinationals, persistent tensions with neighbouring countries and surging blue-collar wages have prompted many companies to start looking elsewhere for large labor forces.
Big companies like General Motors have recently moved their international or Asia headquarters from Shanghai to Singapore as they expand further into India and its main rival as an alternative to China, Indonesia.
Mary T Barra, the chief executive of GM, came to Pune last September to oversee the start of Chevrolet exports from there to Chile. She is also scouting for opportunities to expand in India’s auto market, which the company predicts will be one of the world’s three largest by 2020. “All the circumstances have come together to make manufacturing and growth happen,” said Shailesh V Haribhakti, the chairman of MentorCap Management, a boutique investment bank in Mumbai.
As India’s fortunes begin to shift, Modi is trying to tackle thornier economic issues. He wants to expand the private sector’s role in coal mining, a government-dominated industry. He is looking to accelerate the construction of roads and other infrastructure. On the tax front, Modi hopes gradually to replace state taxes on goods that cross state borders with a national tax.
In a January visit to New Delhi, President Barack Obama highlighted chronic regulatory obstacles in India. “There are still too many barriers – hoops to jump through, bureaucratic restrictions – that make it hard to start a business, or to export, to import, to close a deal, deliver on a deal.” But Obama acknowledged the country’s progress, saying, “Prime Minister Modi has initiated reforms that will help overcome some of these barriers.”
The World Bank recently ranked India as the 142nd-hardest place to do business out of 189 countries. Legal disputes, often involving land, can bog down even the most sought-after projects. A Boeing aircraft maintenance centre is only now close to opening after a two-year delay in construction of a crucial taxiway, caused by villagers who lay down in front of bulldozers until the state government paid them more for a 200-yard strip of land.
Would-be builders of large factories also worry about India’s stringent labour laws, including essentially lifetime employment guarantees for unskilled or semiskilled workers with at least two years’ experience. Those labour law protections are starting to erode. Many companies rely increasingly on contract workers, whom they require to leave after a single year, circumventing the employment guarantees.
Political challenges
For Modi, the most immediate challenge is on the political front. While his party dominates the lower house of parliament, the deeply divided upper house has delayed action on bills for his longer-term reforms. So Modi has relied on executive orders that automatically expire in late April. They can be renewed, though not indefinitely.
Needing support from minority parties in the upper house of parliament, he sent Finance Minister Arun Jaitley to the home of AIADMK leader J Jayalalitha, with flowers on January 18. The trip was controversial since Jayalalitha is out of prison on bail pending her appeal of a conviction last year in a corruption case.
The government has also been criticised for revising the way it calculates gross domestic product. The move on January 30 brought India into line with the practices of most developed nations and produced a sharp increase in the country’s reported economic growth. But critics viewed the timing as a political move intended to give Modi more support.
Even some of Modi’s supporters are cautious about what he has accomplished so far. “Lots of people have been blindly jumping into India on euphoria and hype,” said Rajeev Chandrasekhar, a wealthy financier and a member of the Rajya Sabha who wants more extensive reforms when the prime minister sends the new budget to parliament. “He hasn’t introduced any new ideas, and that is what he needs to do in the Budget.”
Modi’s senior advisers say they have begun making significant changes and that critics are too impatient. “There are a lot of inherited, legacy issues we had to work through,” like budget deficits and persistent inflation, said Jayant Sinha, the minister of state for finance. “You have to give us a little bit of time for every business to feel the difference.”
International New York Times