India – Key Reforms Remain in Limbo

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Key Reforms Remain in Limbo
Prime Minister Narendra Modi delivered his second Independence Day speech in mid‑August, and used the opportunity to lay out his government’s priorities for the remainder of his term, which ends in 2019. Largely missing from the address was the optimistic promise of sweeping reforms that would transform the Indian economy, a topic that was the central feature of his first Independence Day speech in 2014. The omission reflects the prime minister’s recognition that the BJP-led National Democratic Alliance’s minority status in the upper legislative chamber will continue to be an impediment to implementation of controversial measures for the foreseeable future.
The government has proposed the creation of a unified national tax to replace the existing multitude of national and state taxes that create headaches for businesses and deter investment. However, passage has been blocked by the main opposition INC and its allies, which have conditioned a vote in the upper house on the resignation of three top figures in Modi’s BJP who are accused of corruption or other improprieties.
In addition to parliamentary approval, the tax measure must also be passed by at least 15 state legislatures before it can come in to force. The Parliament went into recess in mid-August without taking action, and is not due to reconvene until later this year. Finance Minister Arun Jaitley has suggested that an emergency session could be called, but it is unclear what purpose might be served by doing so. In general, it appears unlikely that the reform will be ready by the start of the fiscal year in April 2016.
The government has similarly failed to make headway on a land reform measure that would make it easier to obtain land needed for infrastructure improvements and development projects. The land bill was put on ice after it provoked mass public protests.
Despite the setbacks on the legislative front, the reforms implemented to date, including steps to reduce bureaucratic obstacles faced by businesses, and the Modi government’s enthusiastically pro-business posture have had a positive effect on investor sentiment. Inflows of FDI increased by 19.8% (year-on-year) in the April–June 2015 quarter, a pace that if sustained could push the 12-month total for the 2015/2016 fiscal year above $40 billion. That said, there is no sign of an imminent flood of FDI. Limits on foreign ownership in big-box retail and the defense sector pose an impediment to a significant increase in US investment, which has accounted for just 6% of total FDI inflows over the last 15 years.

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