India on the Cusp of Reform

Modi’s Three-Year Scorecard

Three-and-a-half year into his tenure, Prime Minister Narendra Modi has embarked on a sweeping reform movement, fulfilling key campaign promises to boost job creation and increase foreign direct investment (FDI) into India.

With the introduction of pro-business policies, the administration hoped to untangle notorious amounts of red tape that has stifled business in the past, as well as revive growth within India’s vapid manufacturing sector.

Under Modi, India’s annual GDP grew from 5.5% in 2013 (before he assumed office in May 2014) to 7.5% in 2015 and 8.0% in 2016. [Source: India Central Statistics Organisation, Bloomberg]

Taking bold measures, Modi enacted India’s first national bankruptcy law in 2016 which would allow enforcement of contracts and a swifter resolution of insolvency cases that has weighed down on its financial system.

More economic reforms followed including a radical banknote demonetisation move last November which saw India scrap its high-value 500 and 1000 rupee currency bills, as part of efforts to stem corruption, curb its shadow economy and flush-out ‘black money’ from its financial circulation.

In July’17, India ushered its boldest economic move yet, rolling-out its first comprehensive Goods and Services Tax (GST) which replaced its prior complex multiple indirect tax structure. The GST Act would subsume more than a dozen state and central levies into one unified tax structure, bringing it under a single market.

The Pain of Reform

These reforms which are unprecedented, constitute important structural transformations that would expand India’s economic potential, bolster growth, and improve macro stability.

Yet, India stands at an important crossroad today – as the painful effects of reform begin to bite and wreak short-term economic havoc to both businesses and citizens across the country, as they adjust to these new changes.

India’s GDP slumped to a three-year low to 5.7% y-o-y for the quarter ended June. Both the World Bank and International Monetary Fund (IMF) have also cut their GDP forecast this year citing lingering effects of India’s sudden demonetisation which took out demand, as well as transition costs related to the new GST regime.

The disruptive effects caused by the implementation of GST was well publicised and can be seen by the fall in its manufacturing PMI which decelerated to 50.3 in October, pointing to a stagnation of activity and curb in inflows of new orders.

However, since then we’ve seen the administration making concessions for small businesses to ease their transition to the new GST regime.

But these are all short term pain for a better future.

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