India business insights

Modi levels the playing field for foreign investors

Manoj Ladwa, our guest author, is the founder and chief executive of India Inc., publishers of India Global Business magazine and India Investment Journal, and editor of a new ‘landmark’ study on UK-India Relations Beyond Brexit.

Three major structural reforms, implemented back-to-back by the Indian government, have begun to deliver results and disrupt the cosy status quo that had come to typify doing business in the country over many decades. This makes it an exciting time to be doing business in India.

These reforms – demonetisation, the new Goods and Services Tax (GST) and the passage of the Insolvency and Bankruptcy Code (IBC) – have all unleashed the proverbial cat among various cosy cabals of pigeons.

Demonetisation of high value currency notes has sucked out 86% of the country’s currency in circulation. The introduction of GST has replaced a welter of central and state levies and turned all of India into a single common market. And IBC has put the frighteners on some of India’s biggest corporate defaulters

Demonetisation spurs digital transactions

Demonetisation has considerably reduced the use of unaccounted money (called ‘black money’ in India) in business. Growth in digital transactions, which leave a trail, has accelerated to over 55% post-demonetisation. This compares to a growth rate of less than 20% in the period prior to demonetisation, official figures show.

This indicates that the incidence of black money in the Indian economy is reducing. If this trend is maintained – and there is every reason to believe it will, given the Modi government’s relentless campaign against this menace – doing business in India will become considerably easier in the years to come. This will help level the playing field between Indian and foreign investors.

GST promises to deliver seamless tax regime

GST has woven all of India into a single common market. The initial teething problems were not entirely unexpected – any measure that replaces more than 20 state and central taxes with a single levy across a country as diverse and large as India is bound to face hiccups during its rollout.

But with Finance Minister Arun Jaitley and his team proactively easing compliance processes as well as many of the rates, GST has become much easier. Ongoing measures to iron out the remaining glitches promise a much more seamless indirect tax regime within the next few quarters.

IBC a major step to combat crony capitalism

The implementation of the IBC promises to revolutionise loan recovery – until recently a major pain point in India. Already, some of India’s marquee companies and business houses, long accustomed to a lackadaisical recovery process that lacked bite, have been dragged into the process.

The result is great optimism that the days of crony capitalism in India’s banking system, which thrived on political patronage and state largesse, are numbered.

No longer business as usual

These three deep structural reforms have inflicted some pain on the business community, and will continue to do so. But over the medium-term, they signal that it will no longer be business as usual in India.

By breaking the back of the black economy, by easing India’s horribly convoluted indirect tax regime and by dealing a body blow to crony capitalism, the Modi government is setting the stage for a rule-based and transparent system where merit will trump connections – and create the platform for sustained future growth.

For more information, please contact Manoj Ladwa.