Prime Minister Narendra Modi's first year in power has resulted in some broad improvements in India's business environment, but passing legislation has been increasingly difficult with the upper house being controlled by the opposition.
IHS perspective | |
Significance | The Bharatiya Janata Party-led government marked its first year in power on 26 May, but its honeymoon period appears to have ended already with the opposition successfully delaying its legislative agenda in the upper house. |
Implications | In its second year, the government is likely to prioritise the implementation of the Goods and Services Tax (GST) and the passage of labour and land acquisition reforms. |
Outlook | Bills with broad political support, such as the GST, are likely to be passed, albeit with delays. However, the opposition's "anti-poor" criticism of the BJP-led government, and the accompanying civil society resistance, will either obstruct or dilute other business-friendly policies. |
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Indian prime minister Narendra Modi speaks during the launch of a television channel for |
The Bharatiya Janata Party (BJP)-led government came to power with the strongest mandate any Indian government has had in three decades. The ruling party's pre-election campaign was fought principally on a platform to revive economic growth and job creation. These two factors, along with Prime Minister Narendra Modi's track record in invigorating foreign investment during his time as chief minister of Gujarat, had raised hopes of a dramatic improvement in India's business environment.
However, from an investor's perspective, the BJP-led government's first year in power has yielded mixed results. Modi's successes have included being able to energise the traditionally slow-moving Indian bureaucracy and raising foreign investment caps in railway infrastructure, defence, and insurance. Perhaps most significantly, given the importance of attracting foreign investment and economic growth, the statistics ministry reported on 29 May that GDP growth had increased to 7.5% in fiscal year (FY) 2014/15 – although low oil prices have been a major contributor for this (see India: 1 June 2015: Modi's first year as PM lifts India's GDP to 7.3% in FY 2014, but raises questions of true achievements).
End of honeymoon period
Although Modi continues to enjoy strong support among the electorate, the prime minister has begun facing more direct criticism, including from the media and the business lobby, which have until now been strong Modi supporters. Civil society groups have also begun raising concerns about the government's policies toward the country's poor. Figures such as the reported 40% increase in farmer suicides under Modi have fuelled anti-BJP sentiments and protests. The Indian National Congress (INC), the main opposition party, has capitalised on this and developed a "pro-business, anti-poor" critique of the BJP-led government's policies. As a result, the INC has been able to negate the BJP's overwhelming majority in parliament's lower house by blocking business-friendly legislation in the upper house, where an INC-led majority alliance is in control – at least until 2016.
Outlook and implications
During the next year, the INC-led opposition is likely to continue to use its majority in the upper house and its anti-poor criticism of the government to block Modi's legislative agenda. Civil society groups and trade unions are also likely to pressure the government, particularly over the land acquisition proposals and labour reforms. These factors are likely to have a significant effect on Modi's policy priorities in the BJP-led government's second term.
Passing land acquisition laws through parliament
The INC-led opposition in the upper house's most high-profile achievement was delaying the BJP's proposed Land Acquisition Bill 2015. The legislation amends a law introduced under the INC-led government in 2013, removing its requirements to obtain the consent of 80% of farmers for land being acquired for private projects and 70% for public-private partnerships. The change is a high priority for Modi and his plans to develop India as an international manufacturing hub and to boost infrastructure. The government has enacted the bill into law through ordinances, but these are only temporary and parliamentary approval is required to make the law permanent. The BJP-controlled lower house sent the bill to a joint committee in May and the government is likely to attempt to push through the legislation again in the monsoon parliamentary session. However, unless the proposals are significantly diluted, opposition in the upper house is likely to remain entrenched.
Implementing the GST
The government aims to replace the current complex network of central and state government taxes, a major burden for investors, with a single national sales tax by April 2016. The government mooted the Goods and Services Tax (GST) legislation in parliament in its last session in May, but again, the INC-led opposition in the upper house managed to block the law. However, the INC is a strong supporter of the GST, and has asked for the law to be examined due to BJP changes. This broad political consensus, which has previously proved elusive, means that the GST is likely to be implemented under this government. However, the April 2016 timeline appears ambitious given the legislative delays and requirements for state approval. Unless the law is approved in the monsoon session, it is unlikely to be implemented until 2017.
Reforming labour laws
The government had planned to push through labour reforms in the last parliamentary session, but the opposition to the GST and land acquisition laws meant that its Labour Code on Industrial Relations Bill 2015 was never put forward. The law is vital for improving India's operating environment; it eases and to some extent clarifies India's existing archaic labour regulation. However, trade unions have opposed its proposal making it more difficult to form new unions and allowing businesses to dismiss up to 300 workers without prior government approval, up from the current limit of 100. Modi has two potential approaches to labour reform over the next year. It can either dilute the proposals to get opposition support at the central government level, or it can push the reforms through state governments where the BJP is in power. Either way, union opposition is likely to be strong.
Amending approach to retrospective taxation
Modi has pledged to make India's tax regime less adversarial for foreign investors. This is primarily in relation to the May 2012 tax law amendment allowing the government to levy capital gains tax on cross-border acquisitions retrospectively to April 1962, which has triggered a spate of tax disputes with foreign investors. The BJP-led government did send a positive indicator by deciding against appealing a High Court decision in January in favour of Vodafone in one of its tax disputes. However, there remains a lack of clarity in government tax policy. Fresh retrospective tax demands have been made, with Cairn India receiving a USD3.2-billion notice in March 2015. Moreover, in late 2014, the tax department began issuing retrospective Minimum Alternative Tax (MAT) notices to foreign institutional investors (FIIs). In the fiscal year 2015/16 budget, the government lifted the tax for investments made after April 2015, but in the same month, finance minister Arun Jaitley also told Indian media that the government would raise USD6.4-billion through tax notices that had already been made. Explaining that the uncertainty is a legacy of the last government, in May, Jaitley referred the issue to a high-level committee. However, the government will have to act more decisively over the next year regarding its taxation policy and in particular, in reining in the tax department, which ostensibly has been operating against government policy.