News Wrap: October 16
In this section, ASG covers a few relevant developments and announcements of the last two weeks, with insights on their implications for businesses.
Bihar elections significant for Modi government
Although it is only a state-level election, the ongoing elections in Bihar could significantly affect the government’s ability to pass critical reforms by altering the ruling National Democratic Alliance’s (NDA) numbers in Parliament.
Bihar – an eastern state that is the third-largest by population – began the first of five phases of polling this week. Opinion polls indicated a neck-in-neck contest between the ruling Bharatiya Janata Party (BJP)-led NDA and the opposition’s Grand Alliance. In recognition of the central role that Bihar plays, Prime Minister Modi has been personally spearheading the campaign for the BJP.
The election is a testing ground for the ruling government as it seeks to consolidate power in the states. Although the BJP and its allies won all of the major state elections in 2014, the party was routed in the most recent state elections held in Delhi in January 2015. Winning the Bihar Assembly elections will help the party shore up its strength in the Rajya Sabha (Upper House of Parliament) where it has, so far, been unable to push through key reforms like the Goods and Services Tax (GST) Bill and the Land Acquisition Bill. Even if it wins Bihar though, the BJP will not have a majority in the Upper House.
Growing dissent in the aftermath of beef ban
While this is unlikely to have any significant impact on the business community, dissent against the BJP is growing for their handling of the unprecedented mob-led murder of a man for allegedly killing a cow.
The ruling BJP government and Prime Minister Modi are facing serious criticism from several quarters for not explicitly condemning the murder of Mohammed Akhlaq, who was stoned to death by a mob last month for allegedly eating beef in the state of Uttar Pradesh, where killing cows is banned.
This incident occurred shortly after beef was banned in three states where BJP governments recently came to power. The Prime Minister’s silence and the inflammatory comments made by some BJP politicians are being seen as the government’s tacit acceptance of the incident.
Pressure on the government to address the issue directly is growing in civil society and domestic and international media. Twenty-five well-known authors have returned their Sahitya Akademi awards, the nation’s highest literary award, in protest. If the issue is not adequately addressed, opposition parties could stop Parliament from functioning in the next session.
Larger-than-expected central bank cut in interest rates
The Reserve Bank of India (RBI)’s bi-monthly decisions on interest rates, in addition to affecting lending and investment, are a good indicator of the Bank’s faith in the government.
In September, the RBI surprised investors and businesses by cutting interest rates by 50 basis points, leading to immediate and substantial gains in domestic capital markets. The cut demonstrates RBI Governor Raghuram Rajan’s faith in the government’s ability to keep inflation low and meet its fiscal deficit targets.
The cut, coupled with increased foreign investment limits in government securities, is expected to drive substantial growth in investments and demand in the short term. The lower cost of borrowing will give a boost to the capital expenditure of firms, which is at a five-year low. Sectors like automobiles, housing, and real estate are expected to benefit the most because the rate cut comes in time for the upcoming festival season.
Government preparing to reintroduce the GST Bill in Parliament
The Goods and Services Tax (GST) Bill is being closely watched by all businesses – domestic and international – because the simplified tax structure that it proposes could significantly improve the ease of doing business.
The Finance Ministry has initiated the process of seeking stakeholder opinion on the GST Bill, specifically on business registration, refund, and payment processes. This is part of the government’s plan to introduce and pass the Bill in the winter session of Parliament, which is expected to begin in late November.
The GST Bill was introduced and passed in the lower house of Parliament last year but stalled in the upper house, where the ruling government does not have a majority.
The government is conscious of the significance of passing the bill for its pro-business reform agenda, and has worked with state governments to get their support in the Rajya Sabha. It hopes to roll out the new tax regime by April 2016. The passage of the bill could be the “big-bang reform” that investors are looking for. The bill is also a way for the government to save face after its failure to pass the Land Acquisition Bill in the Rajya Sabha last spring.
Faster resolution of double taxation disputes for multi-national corporations
Tax reform has been high on the government’s agenda because of the adverse impact that India’s complex tax regime has on the ease of doing business.
The Indian Finance Ministry directed India’s income tax department to withdraw over one hundred pending tax cases against multi-national corporations (MNCs). The Finance Minister announced his intention to see tax disputes resolved at an early stage through administrative or judicial means, and has decided to use Advanced Pricing Agreements (APAs) to reduce tax litigation and boost investor confidence. Already, 16 APAs have been signed and another 140 are scheduled to be finalized by the end of the current fiscal year.
This move came just months after India’s Supreme Court ruled in favor of MNCs like Shell and Vodafone, exempting them from the tax liability on alleged undervaluation of shared transactions among group corporations. India’s tax regime is considered fairly hostile so this move by the Finance Ministry could help reassure investors that the Modi government is committed to attracting investment.