The year 2016 has been one of several key reforms for India. The passing of the Goods and Services Tax (GST) legislation and the shift towards a vote based Monetary Policy Committee (MPC) by the Reserve Bank of India (RBI) are the most notable.
On improving the ease of doing business, the Modi government has successfully passed laws to knock down red tape and phase out retrospective taxation on cross border investments. Reform in labor laws, however, has been slower due to political pressures and remains the elephant in the room.
Overall, the government’s open attitude to foreign investment, more decentralized revenue sharing with the states and the crackdown on tax avoidance reflect an implicit shift in the conduct of governance. This change is a net positive for reforms going into 2017 and beyond.
The unexpected demonetization of higher denomination currency notes is only the latest in the Modi government’s busy calendar of economic announcements. It comes after the government allowed a four-month long period for tax evaders to come clean and pay their dues in exchange for immunity from further inquiry. The year 2016 has been one of numerous reforms for India. A host of arcane and colonial era traditions in the budget making exercise are been jettisoned – the railway budget will been merged with the union budget, the union budget itself will be brought forward by a month, to name a couple.
The passing of the GST legislation and the shift towards a vote based Monetary Policy Committee by the RBI are the most notable reforms on the economic front. The passage of the GST legislation has set in motion the move towards making India a true customs union. Besides improving efficiency in the overall supply chain by cutting red tape, GST will also incentivize tax compliance which ultimately boosts tax revenues. It has been scheduled for an April 2017 launch under a four-tier rate system.
With regard to the conduct of monetary policy, in 2016 the RBI officially became an inflation targeting central bank. The decision on benchmark policy rate will now be a vote-based exercise by a six-member committee with three members appointed by the government. To its credit, the Modi government kept the MPC free from excessive political interference by deputing three respected economists rather than politicians as its nominees to the committee.
In terms of further opening up of the country to foreign investment, the government has permitted 100% FDI in sectors such as defense, civil aviation, pharma, food processing and many more.
Reforms to improve ease of doing business
Prime Minster Modi has made improvement in ease of doing business a top priority with the government stated objective being to reduce the time for starting a business to less than ten days. New legislations enacted in 2016 knock down substantial red tape and phase out retrospective taxation on cross border investments. The passage of a new bankruptcy law allows creditors of insolvent firms to recover their dues within 180 days. Along similar lines, the public contracts dispute resolution law provides a systematic framework for addressing disputes in infrastructure and construction projects and projects involving public utilities.
Amendment of restrictive labor laws is an area where progress has been slower. In India, changes to labor laws can be made by both the Centre and the state governments. To circumvent political opposition at the federal level, the Modi government has urged states to amend labor laws individually at the state level.
The overall impact of reform efforts is yet to be reflected in a significant improvement of India’s ranking on ease of doing business. India’s ranking on the World Bank’s ease of doing business report for 2017 has improved by one notch to 130 out of 190 countries. The sub-categories showing the most improvement are – enforcing contracts, trading across borders, registering property and accessing electricity.
A bottom-up approach to governance is positive for future reforms
Besides the high profile structural reforms, there has been progress on other areas that immediately affect the masses. The central government has allowed state governments a larger share of the common pool of direct tax revenue – the right approach for a large country like India as it allows state governments to spend money according to local requirements.
Bottlenecks in the supply chain for agricultural produce are being tackled by introducing e-auctions that allow farmers to market their produce nationwide. Again, this is vital for a vast country like India where food inflation has mostly been due to seasonal shortages and farmers lacking access to distant markets for their produce.
The government’s open attitude to foreign investors, more decentralized revenue sharing with the states and the recent crackdown on tax evasion reflect an implicit shift in the conduct of governance. This change is a net positive for reforms going into 2017 and beyond.
Janki Sharma is a freelance economist based in Singapore and writes for Macrovue.
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