The election campaigns of the incumbent (Indian National Congress or Congress) and the challenger (Bhartiya Janata Party or BJP), in the recently concluded Indian elections, were studies in contrast. While the BJP aggressively pushed the polarizing figure of its prime ministerial candidate Narendra Modi, communication from the Congress appeared inadequate, reluctant even to sell some of its best work to the electorate. The result was a clear sweep by the BJP – winning 52% of the parliamentary seats, despite winning just 31% of the polled votes – and the first single-party majority government in three decades. Such a clear party mandate caught many by surprise, including those in the victor’s camp. With less than 10% of the seats in the lower house, the Congress will not be able to assume leadership of the official opposition party (a cabinet rank position in government) by itself – the Congress’ Gandhi-Nehru dynastic appeal has clearly worn thin. 

In this article, we analyze the implications of this change of guard in Delhi, for the business community in India and abroad. 

A Functioning Parliament 

With a clear majority government of 282 of the 553 seats in the lower house (Lok Sabha) of parliament, the new BJP government can function without coalition partners getting in its way. Parliamentary proceedings in the lower house are expected to be tamer and more productive in the next five years. However, with only 62 seats in the 245-seat upper house (Rajya Sabha), the government will be unable to pass legislative bills without the support of the Congress and its allies (as non-money bills require passage in both houses). The numbers in the upper house are expected to change in BJP’s favour in 2016, when a third of the upper house seats are up for re-election. 

Till then, the BJP government is expected to focus on administrative improvements, with an emphasis on taxation reforms, to reassure investors and help re-start the investment cycle. Following are three taxation-related policy initiatives that the new government is expected take up in the first 100 days of its tenure: 

Roll Back Of Retrospective Taxation Provisions – The BJP had promised to end the colorfully-worded ‘tax terrorism’ of the previous government and win back investor interest as its first priority. Prime Minister Modi is unlikely to delay a resolution on this contentious issue and is expected to provide clarity on this subject by July 2014, during the budget session of parliament. 

Goods And Service Tax (GST) Bill – This significant legislation harmonizes the multiple central and state-level indirect tax regimes currently in place, and replaces it with a single unified regime. The new government is hoping to enact the necessary legislation for a nationwide GST rollout by April 1 2015. The Congress has promised, for now, to support the government and allow passage of both, the constitutional amendment bill (dividing central and state tax remits) that needs to precede the GST Bill and the GST Bill itself, in the upper house.

Direct Tax Code (DTC) – this will replace India’s archaic income tax laws and simplify the tax structure. The roll-out, however, is expected to coincide with that of the new GST regime. 

While speaking in support of ‘job creating’ Foreign Direct Investment (FDI) in all sectors, other than multi-brand retail, it remains to be seen which of the FDI related legislations will finally be tabled by the government. Some of the bills introduced by the earlier government (which have now lapsed with its dissolution) – Civil Aviation Authority Bill, Forward Contracts Amendment Bill, Insurance Laws Amendment Bill which seeks to raise FDI limits in the insurance sector from existing 26% to 49%, the Microfinance Bill and the Bill proposing entry of foreign educational institutions – may be selectively re-introduced in the lower house over the next 12-18 months.

A Leaner Government Structure 

Delhi policy circles are abuzz with talk about a leaner executive structure and a consolidation of related ministries and government departments (the earlier government had 71 ministers to accommodate coalition allies into the executive arm). This one step alone, if implemented, is expected to cut bureaucracy significantly, reduce inter-ministerial turf wars, and allow faster decision making. 

Current power-related ministries – Power, Coal, Petroleum & Natural Gas, Atomic Energy and Renewable Energy – may be merged into a single Ministry of Energy, over the next few months. Likewise, a new Ministry of Transport could see the present three ministries – Railways, Surface Transport & Highways, and Shipping & Ports, consolidated under a single ministry. Tourism, Culture and Civil Aviation ministries are expected to be merged on account of the synergies between them. The Commerce Ministry, and the Department of Industrial Policy and Promotion (DIPP) under it, is likely to be brought under the External Affairs ministry – a strong indication of the economic and trade oriented foreign policy that the new government is keen to pursue. FDI policy and implementation may be brought under a single ministry, the Finance Ministry (currently, it’s split between the Commerce & Finance Ministry). This should put an end to the turf wars between the two ministries that have been blamed for policy inconsistencies and for confusing investors. 

The new Prime Minister’s Office (PMO) will be a significant power center and senior bureaucrats from Narendra Modi’s team in of Gujarat are expected to join him in the PMO.

One area where the government seems to be keen to break new ground is improving the working relationship between the central government in Delhi and the 28 state governments. If indications are anything to go by, there may be new ministry for state affairs. A policy first, it has the potential to trigger a new dynamic in centre-state relations and is a candid admission of the importance of the efficient state-level implementation on all policy initiatives. 

Infrastructure Investments & Energy Sector Reforms 

The new government is under pressure to follow-through on its commitment on infrastructure investment as articulated in its election manifesto before the elections. Prominent amongst these were establishment of a high-speed national railway network (called Diamond Quadrilateral system), integrated public transport projects including development of waterways for passenger and cargo transport, a national fiber optic network, and a ports modernization programme. 

Project implementation of stalled infrastructure and industrial projects, even without embarking on these new projects, will be a key driver in plans to revive growth. The new government has promised to create an easier operating environment, reduce the number of clearances required for projects and better coordination between the different arms of the government to get stalled projects moving. 

The private sector has been hoping for an early review of the recently enacted Land Acquisition Act that has stringent provisions (some would say ‘anti-industry’) towards land acquisition for infrastructure and industrial use. The new government could move an amendment later in its term, once it has secured support for it in both houses i.e. post 2016. 

Energy sector reforms have been identified as another priority area. There have been allusions about a re-structuring of the coal sector and allowing private participation in exploration. The BJP’s pre-election manifesto spoke about expanding gas grids across the country, for both consumer and industrial use. Domestic manufacturing is expected to receive a lot of attention by the new government – particularly in the area of defence manufacturing, and a strong preference for technology-transfer agreements.

The New Cabinet 

The new Indian government took formal charge with the swearing in of the country’s 15th Prime Minister and the cabinet of ministers (six of them women), along with a number of important Ministers of State with independent charge. A larger team will be announced in due course.

Foreign Policy Signals 

The new Prime Minister Narendra Modi seems to have begun well. Invitations to prominent world leaders to the swearing in ceremony indicate a confident and pragmatic foreign policy vision. The presence of the Pakistan Prime Minister Nawaz Sharif along with other South Asian leaders at the swearing in ceremony speaks of good beginnings. Prime Minister Narendra Modi has committed to visit Bangladesh first in his official capacity as the Indian Prime Minster – an indication of the priority accorded to relations with India’s immediate neighbours by the new political leadership. 

The BJP pre-election manifesto had spoken about ‘revising and updating’ India’s nuclear doctrine of no-first-use policy and making it ‘relevant to the challenges of current times’, surprising many within the BJP itself. A revision of the nuclear doctrine combined with expected increases in defence spending is bound to unsettle India’s neighbours. Modi’s preemptive outreach to them early on speaks of a bolder foreign policy initiative than has been seen by the earlier government. International watchers in the West have been critical of India’s failure to spell out a larger role for itself in global affairs. It will be interesting to see how Narendra Modi and the Foreign Affairs Minister Sushma Swaraj go about changing this perception.

Conclusion 

The new leadership has many good ideas and plenty of enthusiasm. The challenges too, are not insignificant. Kickstarting the investment cycle has to be done along while maintaining fiscal stability; cutting the USD 41bn annual subsidy bill on food, petroleum and fertilizer; and pulling down retail inflation, which remains stubbornly above 8%, The sovereign rating is on thin ice – at the lowest investment grade (BBB-) with a negative outlook, as per Standard & Poor.

The Indian capital markets and business community have been exuberantly celebrating the BJP win. The BSE Sensex and NSE Nifty market indices touched record highs after the BJP’s electoral victory, discounting predictions of a weak monsoon (that could weaken rural incomes). 

All this positive sentiment puts the weight of expectations on Modi’s new team. There is much work to be done. With little room to maneuver, India’s new political leadership will need a repeat of their electoral performance to kick-start growth in the Indian economy and to get economic giant to dance again.

For further information, please contact:

Amrit Singh Deo, Director, FTI Consulting
[email protected]