India’s Reform One Year Later

In May of 2014, India’s Prime Minister Modi came into office with sky-high investor expectations. Now, approximately one year later, it is time to evaluate the progress that has been made.

Long-Term Potential Is Exciting

What is fueling India’s long-term potential?

• Reform agenda of current investor-friendly government
• Fiscal discipline supported by lower crude oil prices1
• High gross domestic product (GDP) growth compared to other markets
• Favorable demographics

The Reform Effort Is Making Progress—‘Made in India’

Reforms have been at the very core of the current Indian government. With an eye on a revival of the manufacturing sector, one of the first projects Modi kick-started was ‘Made in India’. Under its foreign trade policy, the commerce ministry recently unveiled a raft of procedural and tax incentives for domestic manufacturing services. The key goal: double India’s annual exports to $900 billion by 2020 from its current level of around $470 billion.2

Mission Critical: Removal of Key Impediments

Many discussions of India’s progress and potential come down to infrastructure. India needs increased investment in this area, but under the current policy it is not a simple matter to start projects quickly.

Currently, acquiring land for setting up industries or infrastructure is a big hassle, and government has proposed sweeping changes to current law, including removal of the consent clause, where the government can compensate and acquire private land without approval if a project falls in one of a few particular categories. The bill has been passed by the lower house of Parliament but is pending review in the upper house, where it faces severe pushback from opposition parties. It remains to be seen what happens; however, if the bill is passed it will be a big boost to urbanization and infrastructural growth in India.

The importance of the fact that attempts are being made in this—very politically charged—area in India cannot be overstated. Anyone interested in India should be paying attention to developments on this front.

Oil Prices Have Given India a Raise

On the fiscal side, a slide in oil prices from well over $100 a barrel to about $60 a barrel has been a windfall for oil importers like India. About a year ago, crude oil imports accounted for roughly 34% of India’s $451 billion total imports, now they account for roughly 25%,3 which means an extra 9% in the government’s kitty. This has helped cool inflation, and as a result, the Reserve Bank of India (RBI) cut repurchase (repo) rates for the third time in a row on June 2, 2015.