- April 20, 2019
- Posted by: Vishnu Krishna
- Category: Politics & economics
The world’s largest democracy, also one of the fastest growing economies is in the midst of a national poll. The political and economic fate of 1.3 billion is at stake. The polling exercise itself is no mean feat – it will take not less than 39 days for it to be completed. Countries around the world, multinational corporations, multi-lateral institutions are all watching with interest as to which party or coalition of parties shall form the next government.
Whichever party(ies) comes to power will have its work cut out – to take India’s game to the next level. Despite the feel-good factor (some would argue against) of the past five years since Modi Government was sworn in, a lot still needs to be done. To be honest with you, a country of the scale & complication of India requires not 1 but probably 3 terms of a pro-reform government at the federal level to continuously push the agenda. Only then a visible difference in the living standard of aam admi (common man) will be felt.
Business works on contracts and their enforcement. India lags behind abysmally in enforcement of contracts. While on World Bank’s “Doing Business” scale India jumped from 142 in 2014 to 77 in 2018, it’s ranking in terms of contract enforcement has barely moved. It takes 1445 days (close to 4 years) and 31% of the claim value to enforce a contract. This point alone is of a major concern to foreign investors.
India has always reported a fiscal deficit for as long as anyone can remember. Our combined (state and federal) deficit is in the range of 6-7 percent of GDP. To make matters worse, all parties ahead of the elections have been pushing for competitive populism. Regardless of who wins, this agenda will leave the new government seriously short of funds prompting them to borrow more or cut investment in critical areas like infrastructure. This, in turn, will have a multiplier effect on the private sector and there we have a perfect recipe for self-induced recession. Unless tax collections improve and exports grow handsomely, it would be difficult to come out of such a situation in the short term.
Foreign Direct Investment (FDI) inflows cannot be taken for granted and so the new government will do well to introduces policies that will help create investment and jobs, social infrastructure, further promote exports and ease FDI limits. Some of the draconian regulatory norms like the FLA reporting which serve very little purpose will have to be relooked at. More unshackling of regulatory structure will be required by States as well. Tax rates need not be increased by enforcement of payment of taxes should be improved.
The new government will have its task out – make India a simpler country to do business in – for both locals, existing multinationals in the country and aspiring multinational wanting to get in.