Modi And India’s Economy: What Has Changed For Investors?

 

12 November, 2016

 

 

Modi and India’s economy: what has changed for investors?

 

Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) came to power in 2014 on a forward looking, pro-business and pro-reform ticket. A key element of their agenda was to attract foreign investors and make India an easier place to do business. While Modi has not made the significant strides he initially hoped for, there have been steps in the right direction.

 

• Political wrangling continues to block Modi from implementing his policies. Despite his former economic success as chief minister of Gujarat, more than two years after taking power at the national level some of Modi’s promised economic reforms have been stalled in parliament. Opposition parties in the Rajya Sabha, India’s upper house, where the BJP does not have a majority, have challenged the prime minister’s agenda in an attempt to derail his plans.

 

• India’s legal system remains unreformed. The Indian legal system is notoriously slow and has an overwhelming backlog of unresolved cases. In 2013, there were over 30 million open cases across all of India’s courts. It was estimated that if judges closed 100 cases each hour, it would take more than three decades to clear this backlog alone. Any major changes to India’s judiciary will not be implemented quickly and reforms, like many of the country’s pending court cases, may rumble on inde nitely. These issues can pose serious problems for companies, particularly when it comes to settling commercial disputes in a timely and e cient manner.

 

• There have been positive pro-investment improvements. The government has initiated some changes to make life easier for investors: a bill to amend India’s Companies Act, increased investment in infrastructure, and the easing of foreign direct investment in certain sectors are three such examples. Furthermore, India’s parliament recently passed the Goods and Services Tax Bill, a wide-ranging tax reform which, if implemented, would replace a plethora of federal, state and inter-state taxes with a single levy. This has been a key aim of the Modi government and would go a long way in helping companies in India.

 

• The Modi government has made successful attempts to combat corruption. Bribery and corruption remain the biggest scourge of domestic and foreign companies. During the last decade, India has witnessed some of its worst corruption scandals in years, notably in relation to the non-transparent allocation of coal blocks by the government to public and private companies – so-called “Coalgate” – and the awarding of second generation telecom licenses. But since the BJP have taken power, they have noticeably reduced high-level corruption. Though a positive development, it remains to be seen if this is a momentary reprieve or a broader trend.

 

• The jury is still out as to whether Modi and the BJP can turn the country’s commercial landscape into a more user-friendly destination. If so, investment will undoubtedly increase. Yet India still presents many risks for investors, whether it is the ever-present spectre of corruption, the outdated and under-resourced judiciary, the complex regulatory landscape or India’s aggressive tax authorities. As India’s economy opens up further, however tfully, it becomes even more imperative for companies to understand and mitigate against such risks. This can be achieved through robust due diligence into supply chains, vendors, key stakeholders and business partners. 

 

 

For further information, please contact:

 

Bill Sims, Managing Director, Stroz Friedberg

bsims@strozfriedberg.com