Indian economy gathers pace as the government tries to ‘walk the talk’ on key reforms
With foreign investment, energy security and strategic partnerships at the top of his agenda, the Indian Prime Minister Narendra Modi criss-crossed eight countries, including the US, Australia, Japan and Nepal, meeting more than 40 international leaders in the first six months of his tenure.
Mr Modi is riding high on the improving prospects for the Indian economy, with business sentiment picking up and foreign investors betting big on a market of 1.2 billion people.
World Bank increases India’s GDP
Estimates by a number of international agencies and think tanks point to a sustained economic recovery. The World Bank recently raised India’s gross domestic product (GDP) growth rate projection for 2014/15 to 5.6%. Growth had slipped to below 5% in the previous two fiscal years. Net foreign direct investment (FDI) into India stood at US$14.47 billion in the first six months of 2014-15, up 15% year-on-year.
The inflow is expected to grow significantly in the next few quarters as the government has announced easing of FDI rules for the construction sector and is ready to ‘walk the talk’ on the insurance sector as well.
However, one of the key concerns among foreign investors has long been India’s low ranking (of 142) on the World Bank’s Ease of Doing Business parameter. This too may change in the near future, with the introduction, by the previous (UPA) government, of The Companies Act 2013, which replaced nearly 60-year-old legislation and is aimed at aligning India’s corporate regulatory framework with global best practices.
These developments resonate with court verdicts in two important cases relating to tax disputes between the government and large multinational companies – Vodafone and Shell. The Bombay High Court has ruled in favour of the Indian unit of Vodafone Group in a case involving Rs 3,200 crore.
This gives a major confidence boost to foreign companies with subsidiaries in India. In another case involving a dispute over transfer pricing share valuation, the court passed a judgement in favour of Shell, the global oil giant. Both of these cases made headlines across the globe, risking India’s reputation as a favourable investment destination.
While the government is pondering whether to challenge the court orders in the country’s Apex Court, for now, these judgements have calmed the nerves of large multinationals with significant presence in the country. For Vodafone, however, the court battle is not yet over as it is contesting a bigger tax dispute of around Rs 10,000 crore in the Bombay High Court. The judgement is eagerly awaited.
Even as the government battles it out in the courts, the Indian stock market remains on a roll. The market capitalisation of the Bombay Stock Exchange (BSE) touched US$1.6 trillion on 28 November 2014, a growth of over 40% since the previous year. Foreign portfolio investors put in almost US$40 billion in Indian stocks in 2014, raising the stakes in an economy driven by positive investor outlook and reform-oriented government policies.
Manufacturing hub stalls
The government’s mission to make India a manufacturing hub has been hit by a slump in industrial output in October at -4.5%, as against 2.5% in September. This was on the back of negative growth in manufacturing and consumer goods, although both mining and electricity grew on a year-on-year basis. However, there was good news on retail inflation, which eased to 4.4% in November, compared with 5.5% in the previous month.
The auto sector also registered growth in November after a lukewarm Diwali festive season. Commercial vehicle sales in India grew 9.05% during the month, led by a 40.1% growth in sales of trucks and buses. In the eight months to 30 November, car sales have grown 3.8% over the same period last year.
While the government tries to ‘walk the talk’ on its economic agenda, all eyes are on the upcoming Union Budget, which will be presented in February. The Finance Minister, Arun Jaitley, has indicated that the Budget will usher in a “second generation of reforms”. Despite optimism, India Inc. wants to see more action, particularly on infrastructure, manufacturing and taxation, as it strives to grow rapidly after the years of lull that the Indian economy has seen.
