The Government is also working on improving the country’s inadequate infrastructure. In April 2016, Road Transport and Highways Minister Nitin Gadkari announced that road construction is at an all-time high of 20km per day, and the Government has set an ambitious target of constructing 41km of national highways every day in 2016-17, up from more than 16km in 2015-16. There are also schemes that seek to revive loss-making power distribution companies and revamp public sector banks.
Overall, there is a perception that the Government is working hard. “In the last two years, we haven’t heard of any major scandal,” says Chakraborty. Under the previous regime, a number of scandals had rocked the nation and badly damaged the country’s image.
With a better business environment, India has inched up in the World Bank’s Ease of Doing Business survey, from 142nd out of 183 economies in 2015 to 130th in 2016. Modi hopes to dramatically improve India’s ranking and reach the top 50 within three years. The Government also aims to reduce the time taken to register a business from 27 days to just one.
Improving corporate governance
Back in 2009, the Satyam Computer Services scandal (when the company chairman falsified the accounts by US$1.47b) rocked India’s corporate world. But that proved to be a turning point for corporate governance in India.
The Companies Act 2013 is bringing about considerable change. It mandates that companies must have at least one woman on the board, a third of which must consist of independent directors, and includes rules pertaining to executive salaries, corporate social responsibility and audit rotation.
“Though it is too early to gauge the real impact of the Companies Act, in my view it’s an excellent regulation that has improved corporate governance in India,” says Chakraborty. “It has made directors cognizant of the fact that they need to add value.”
Moreover, beginning this financial year, India is transitioning from Indian GAAP to Ind AS (Indian Accounting Standards) in a phased manner. The change to Ind AS will bring accounting in India substantially closer to the norms followed by global companies under International Financial Reporting Standards (IFRS).
“The international audience will be much more comfortable with Ind AS. Evaluation will be a lot easier,” Chakraborty comments.
The Government has also reduced bureaucracy by making policies consistent and transparent, particularly in the area of taxation. “Today, the Government of India has enunciated a clear stand on retrospective taxation, which is that it will not be resorted to,” says Balakrishnan. Under the previous Government, some major companies had taken the retrospective tax issue to international arbitration. It was one of the main factors deterring companies from setting up shop in India.
India’s Finance Minister, Arun Jaitley, proposed four different schemes to “clean up” past tax issues in the 2016 Union Budget and also proposed a one-time scheme to resolve disputes.
Given India’s complex problems and its huge and diverse population base, there are several challenges that are bound to come in the way of development.
Dispute resolution, for instance, can often take decades. “We need to see improvement in the judicial system. There is a huge backlog with the judiciary,” says Chakraborty.
India’s labor regulations are restrictive and complex, and have constrained the growth of the manufacturing sector, while agriculture remains a concern. Even today, 50% of India’s workforce rely on agriculture and allied sectors for their livelihood. But the economic contribution of agriculture to India’s GDP has been steadily declining since 1950-51, from 53% then to around 13.7% today. Instances of farmer suicides have increased as a result of factors such as a high debt burden and monsoons that don’t provide the rain that arable land depends on. Fragmented land holdings, lack of mechanization and poor access to cheap capital have led to low yield. Indeed, the Modi Government has received criticism for not doing much for agriculture.
Another issue is the slow process for adopting new regulations, which is due to the ruling BJP not having a majority; at the time of writing, there were more than two dozen bills pending in the Upper House of Parliament. Take the case of the Goods and Services Tax (GST), which was intended to be introduced at national level by 1 April 2010 and was finally passed on 3 August 2016. The GST reform – among the biggest reforms of the Modi Government – will have an enormous impact on companies in India across indirect taxes, supply chain, technology compliance, accounting and reporting, and change management.
Moreover, infrastructure development and job creation need to gather momentum. India will be the youngest country in the world by 2020, with a median age of 29, according to research by the IRIS Knowledge Foundation. Creating jobs for its youth is a gargantuan task.
Finally, demand continues to be a big bottleneck. But with good monsoons this year and the adoption of the Seventh Pay Commission by the Government – which will cost the treasury US$16.88b in 2016–17 – there should be more money in the hands of farmers and more than 10 million government employees and pensioners. This is bound to increase demand, triggering more positive spinoffs for the economy. Although there are some hurdles still to be overcome, it looks as if India will continue to grow for the foreseeable future.