Wed, Jun 25, 2014

Does India’s New Government Mean Business?

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India is on the cusp of a new era after this spring’s extraordinary election results. Prime Minister Narendra Modi and the conservative Bharatiya Janata Party (BJP) won landslide victories, giving BJP an absolute majority in India’s parliament. We asked Managing Director Reshmi Khurana, head of Kroll’s India operations, and Senior Director Probal DasGupta, based in Mumbai, to put these recent developments into context in terms of both potential new opportunities and the risks companies need to overcome.

Q. What do these election results mean for the country?
RK: India’s investment slowdown—newly announced projects plummeted from 10 percent of the GDP in 2006-07 to less than 1 percent of the GDP in 2013—which resulted in the decline in growth has been attributed to the problems inherent in coalition governments. That is, a complex regulatory environment combined with policy paralysis and populist state-level agendas. A stable government is expected to be better able to drive the reform agenda necessary for reversing the investment drop-off of the last few years.

PD: India has a tremendous economic engine in its youthful demographics—65 percent of its population is under the age of 35. That’s a working population of over 500 million people, similar to China in the early 1980s when its economy really took off. If India can accelerate growth now and put this population to productive work (preferably in the organized sector), the country can leverage this demographic dividend before the 2020s when it wanes away. So, from a demographics standpoint, the next five years will be critical for determining if India can reap the potential benefits of this workforce and the direction that the country will take.

Q. How can foreign direct investment (fdi) play a role in reviving the india growth story?
RK: India’s economic growth slowed to a decade’s low of 4.5 percent in 2012-13. The country needs FDI to help regain its growth momentum. The government needs to plan for $1 trillion in infrastructure spending in the five years through to 2017, and a portion of it will have to come through FDI. However, according to data from the Department of Industrial Policy and Promotion, FDI into India grew by a meagre 1.5 percent to $2.18 billion in January. So kick-starting FDI should be a key priority for the new government.

Q. What do the elections mean for the foreign investor? Is there cause for optimism?
PD: The center-right BJP (and the National Democratic Alliance (NDA), the broader coalition led by BJP) is expected to drive a pro-business policy agenda. Once the government further stabilizes macroeconomic indicators (e.g., the rupee, current account deficit, and inflation), it will have created a platform for renewed growth, which as Reshmi pointed out, will require foreign investment.

RK: In its 42-page manifesto, the BJP said it would allow FDI across sectors wherever needed for job and asset creation—infrastructure development, and the acquisition of niche technology and specialized expertise. With a majority party now in control of India’s parliament, the law-making body, resolutions are likely to get passed quicker. On the other hand, investor optimism should be tempered by the fact that businesses will continue to face challenges when operating in a complex environment such as India.

Q. Which sectors or industries do you expect to draw the most fdi in india?
RK: I believe over the next two years we will see FDI focused in four areas:

  1. infrastructure;
  2. manufacturing;
  3. retail; and
  4. mining, energy and power.

The priorities of introducing them could depend upon policy changes and political compulsions.

Q. Let’s take one at a time and start with infrastructure. What has been the state of infrastructure in india, and what kind of opportunities await and what risks hinder investors?
RK: In the World Economic Forum’s most recent Global Competitiveness Report, India ranked 85 out of 148 for its infrastructure. So there is much work to be done; the good news is that the BJP has said that infrastructure will be among the priorities. The government might likely begin with low-hanging fruit, which includes fast-tracking approval for 125 projects worth $64 billion previously stalled by the former government. Modi himself has stated that his focus will be on highways, ports and power; for example, he has said that a BJP-led government will revive the National Highway Development program.

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