Rediff.com  » Business » How real is Modi's India revival dream

How real is Modi's India revival dream

By A K Bhattacharya
October 01, 2014 10:53 IST

Given the fact that the country is heading for a fresh round of Assembly elections next month and yet another early next year, the chances of the Modi government embarking on amendments to these laws are very slim.

Image: US President Barack Obama and Prime Minister Narendra Modi in the Oval Office. Photograph: Paresh Gandhi/Rediff

In just about four months after taking charge as prime minister, Narendra Modi has completed his engagement with three major countries - Japan, China and the United States.

These are also the three largest economies in the world - accounting for about 40 per cent of the global gross domestic product or GDP.

Those who believe that these were all foreign-policy summits may not be wrong. But much more significant was the economic agenda that got discussed during meetings around the engagements with Shinzo Abe, Xi Jinping and Barack Obama.

Primarily, these were aimed at attracting more investment into India, where economic activity had decelerated to levels much below its potential.

Thus, at the end of his meetings with the Japanese and Chinese leaders, Mr Modi succeeded in securing investment commitments of over $35 billion from Japan and $20 billion from China.

There are as yet no firm figures of investment committed from the United States, but the new emerging India story - one where the Modi government will facilitate investment to boost the country's manufacturing capacity - has been successfully sold to the business community in the United States.

Image: Rating agency S&P has upgraded India's outlook. Photograph: Kamal Kishore/Reuters

The recent improvement in the rating outlook announced by Standard & Poor's is a reflection of that growing confidence and hope in the Indian economy.

There is no doubt that this is a tremendous opportunity for the Modi government to exploit the favourable sentiment to revive investment in the country.

Expectations of the Modi government are, therefore, running very high.

Naturally, there is now a demand for a slew of domestic policy reforms to facilitate the flow of investments that Mr Modi has secured from these countries over the next few years.

The obvious question is: can the Modi government deliver on the domestic policy front?

And can it live up to the high expectations on major economic policy changes that these high-profile visits have created, aided of course by the rating outlook improvement announced by Standard & Poor's?

Consider the following factors that might well prove to be obstacles in the realisation of the Modi dream to revive India's economic growth.

One, foreign investment commitments are not always an infallible way of reviving growth.

Foreign investors can make commitments, but they will always look for positive signals from domestic players in the Indian economy before actually making the investment.

Image: Foreign investors will invest in India only if economic growth stabilises. Photograph: Truth Leem/Reuters

In other words, the Modi government's task of reviving economic activity through foreign investment flows is unlikely to be achieved unless and until domestic investment picks up.

Unfortunately, India's domestic industry is not yet sufficiently encouraged to commit fresh investments within the country in any substantial way.

 Foreign investment, thus, will help only after the domestic players show the way.

Two, investment promises made at bilateral meetings of political leaders have a greater chance of fulfilment when the country receiving the capital flows suitably reforms its economic laws to make their efficient and effective use in productive enterprises.

India's absorptive capacity as far as foreign investment flows are concerned has remained very limited over the last few years because of successive governments' failure to remove or amend laws that hinder the smooth flow of investments.

Apart from the continuing rigidity in labour laws, there are obvious problems with the way the newly passed law on land acquisition has imposed stiff conditions on compensation and laid down time-consuming procedures to be followed by industry.

Given the fact that the country is heading for a fresh round of Assembly elections next month and yet another early next year, the chances of the Modi government embarking on amendments to these laws are very slim.

The political costs to relaxing both the laws could be huge and the Bharatiya Janata Party (BJP) would naturally not like to take any risks at this stage.

Image: Prime Minister Narendra Modi wants global firms to invest in India. Photograph: Reuters

The dream of a manufacturing boom (or the "Make in India" initiative) can be realised only when these laws are suitably changed and in addition necessary spadework is done for manpower training and skills development.

Three, there is no sign of any early resolution of the many tax disputes that some leading foreign companies have with the Indian government.

Finance Minister Arun Jaitley's Budget had held out the promise that the new government believed in quick settlement of tax disputes with investors.

The BJP had even promised in its general election manifesto that it was not in favour of engaging in what it called "tax terrorism".

But no foreign company has so far reported a quick or amicable settlement of its tax disputes.

Instead, it seems the process will continue for some time to come.

Worse, the recent Supreme Court order cancelling a large number of coal blocks and levying steep penalties on companies has raised fresh doubts in the minds of investors, including those from overseas, about the credibility of the government approval system.

As the coal blocks order showed, decisions taken more than 20 years ago were declared illegal and the businesses set up on the basis of such approvals would now have to shut shop.

To a lay observer, therefore, India today presents two conflicting realities.

One reality shows the prime minister securing commitments of huge foreign investments and raising expectations of policy changes and reforms to kick start the Indian economy.

The second reality, a disturbing one, shows that key reforms and quick steps to settle disputes with industry to debottleneck investment avenues in the country are a long way off.

No objective assessment of the prospects of India reviving its investment climate can ignore the second reality. Nor can it get carried away by the triumphalism associated with the first one.

A K Bhattacharya
Source: source
SHARE THIS STORY