News Wrap: October 1, 2015
In this section, ASG covers political and economic developments, with insights on their implications for businesses.
Political Update: Land Acquisition Reforms
Land acquisition reform has received disproportionate attention from the media and businesses for two reasons. First, land policies are crucial for businesses planning to invest in India and therefore an important component of perceptions about India. Second, the inability of the government to pass reforms in Parliament is viewed as the Prime Minister’s personal defeat. In this context, land acquisition reform is likely to remain a focus area.
The Land Acquisition law continues to be the subject of much discussion with the chairman of the NITI Aayog (the government’s major think tank), coming out in support of state-level land acquisition processes instead of a central law. The ruling government has introduced the Land Acquisition ordinance – an executive order aimed at making it easier for companies to acquire agricultural land – in Parliament three times in the last year. However, the controversial legislation, which is perceived to be anti-poor and anti-farmer, faced criticism not only from opposition parties like the Congress, but also from some of the ruling party’s own allies. In August, Prime Minister Narendra Modi announced that his government would not reissue the ordinance in Parliament. Instead his government will work with individual state governments to implement land reform at the state level.
The debate around the Land Acquisition law is yet another indication of India’s complex democratic structure, which often slows down the pace of reform that multinational companies expect. Encouragingly, the Modi government is stepping up its efforts to influence state governments to push through reforms that are stuck in the central legislature. Chief Ministers from sixteen states previously attended a NITI Aayog meeting to discuss the land acquisition reforms, suggesting that this strategy could work.
Economic Update: Index of Industrial Production
Manufacturing is a major priority of this government because it is convinced that growing the sector is the only way to create jobs and infrastructure for the country’s burgeoning youth population. The index of industrial production is the main tool used to analyze the growth of the sector.
India’s industrial and manufacturing growth has accelerated according to official government data for July released by the Central Statistics Office. Industrial production rose 4.2 percent in July, much higher than analysts predicted. Much of this was attributed to a jump in the manufacturing sector’s output, which grew by 4.7 percent compared to a decline of 0.3 percent in the corresponding month of 2014.
Whether this is a blip or a trend remains to be seen, but these positive numbers are an indication of the direction the country is taking. Overhauling India’s archaic regulatory framework and encouraging the bureaucracy to spur manufacturing will take many years of sustained effort from the government. Bringing this objective to the forefront of its vision for India is an important first step by the Modi government. We expect the focus on manufacturing to remain.
Policy Update: “Small banks” for financial inclusion
This central banking reform is believed to be one of the most influential reforms in India since the 1960s.
India’s central bank – the Reserve Bank of India (RBI) – granted small bank licenses to ten applicants, most of which are in the microfinance sector. The focus of these small banks will be on small businesses, marginal farmers and the unorganized sector. While these banks can take deposits and lend just like large banks, and also trade in forex and sell financial products, at least 50 percent of their loans have to be less than $35,000 for the benefit of small borrowers.
India is home to 21 percent of the world’s unbanked population. The introduction of the small bank category by the central bank could go a long way in providing financial access at the bottom of the pyramid, and has implications for both for-profit and not-for-profit organizations looking to serve this group.
State Update: “Ease of Doing Business” ranking of states
Since most matters are implemented at a state level, tracking the priorities and developments in various states relative to each other is critical to deciding where to do or expand business in India.
A survey conducted by the Department of Industrial Policy & Promotion (Ministry of Commerce), the World Bank and KPMG ranked the 29 states of India on eight parameters – setting up a business, obtaining land and construction permits, complying with environmental procedures, complying with labor regulations, obtaining infrastructure-related utilities, registering and complying with tax procedures, carrying out inspections, and enforcing contracts.
Gujarat (Prime Minister Modi’s home state), Andhra Pradesh, Jharkhand, Chhattisgarh and Madhya Pradesh claimed the first five spots. The Modi-led Bharatiya Janata Party rules all these states with the exception of Andhra Pradesh, which is ruled by its ally.
The survey is the first of its kind and aimed at being a policy tool for various state governments. It is a reflection of PM Modi’s belief in “competitive federalism” where states compete with each other to attract investment.