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Booming India (1) How has India’s Business Environment Changed under the Modi Administration? Kohei Shiino Associate Professor Faculty of International Studies Takushoku University [Date of Issue: 31/January/2019 No.0286-0287-1097]

Date of Issue: 31/January/2019

Booming India (1)
How has India's Business Environment Changed under the Modi Administration?

Kohei Shiino
Associate Professor
Faculty of International Studies
Takushoku University

How has the Indian business environment changed since the Modi administration came to power in 2014? Here I look at the main improvements, including infrastructure development (a long-term issue in India), progress toward a cashless society thanks to the elimination of large-denomination bills, and tax reforms such as the introduction of a goods and services tax and corporate tax cuts.

1. Economic evaluations improve, power shortages almost eliminated

Evaluations of the Indian business environment are changing. The “Ease of Doing Business” rankings released by the World Bank in October 2018 have attracted a lot of attention recently. India rose from 100th place in 2017 (142nd back in 2014) to 77th, a fact which Prime Minister Narendra Modi too has been highlighting as an achievement of his administration.

Underdeveloped infrastructure has long been seen as India's biggest issue, but the situation is gradually improving. This is borne out in the evaluations of Japanese companies in the results of a JETRO questionnaire survey announced in March 2018.

The survey regularly asks Japanese companies about business environment issues in the major Asian economies, with around 3,000 firms responding. Where “underdeveloped infrastructure” was selected by 55.7 percent of respondents back in FY2013, in FY2017 this had dropped to 33.3 percent.

Getting rid of power shortages has been a major factor behind that evaluation. The ratio of power supply shortfalls to maximum power demand has dropped from 4.5 percent in FY2013 to 0.8 percent in FY2018 (April-October figures), with power cuts almost eliminated. The improvement is primarily due to the rapid spread of large-scale solar power generation in India.

In addition, a metro system has been developed to serve Delhi and its satellite cities, with the total length of 327 kilometers already exceeding that of Tokyo's subway system (the Tokyo Metro and Toei subway system together measure around 304 kilometers), with the urban transport network evolving rapidly.1

Building clusters are appearing in certain areas such as Gurgaon (officially named Gurugram) and Aerocity, both of which are close to Delhi Airport, with urbanization proceeding at least on a patchwork basis.

2. New signs: A cashless India and universal banking

The economy policy instituted by the Modi administration that has most surprised the international community was the November 2016 banning of the use of high-denomination bills (500 and 1,000 rupee notes).

This policy is designed to discourage counterfeiting and crack down on illegal cash holdings, but suddenly becoming unable to use large bills has also created awareness of the convenience of smart phone payments, etc., accelerating the shift to a cashless India particularly in the cities.

At the same time, with only 2.0 percent of Indians using mobile money and only 3.0 percent owning credit cards (World Bank, 2017), India has just started on the road to a cashless society, and it's not yet possible to go shopping without a wallet like in China.

However, the Modi administration is pursuing a universal banking policy aimed at equipping every citizen with a bank account. The plan is to link universal banking with the national identification system Aadhaar that was introduced by the previous Manmohan Singh administration.

The ratio of the population with a bank account at a financial institution in India has in fact risen from 53 percent in 2014 to 80 percent in 2017. This is around the same level as in Thailand (81 percent) and China (80 percent), and is well above Indonesia (48 percent) and the Philippines (32 percent).2 Universal banking will promote financial inclusion (whereby low income earners are given access to financial services) and more efficient subsidy administration (as a result of paying subsidies directly to recipients), while increasing the account ownership ratio should also lay the foundations for a cashless India in the future.

Unicorn companies facilitating that cashless India are also growing. A leading example is Paytm, a local company that has been providing digital payment and e-commerce services since 2010. In 2015, the Alibaba Group invested in the company, followed by Softbank in 2017. In Japan, the smartphone payment service PayPay started in the fall of 2018 by the Softbank Group uses the Paytm barcode and QR code payment technologies.

Ride sharing is becoming popular in India, and one big local player in this market is Ola Cabs, which is also contributing to a cashless India through its digital payment service called Ola Money.

3. Integration of complicated indirect taxes, corporate tax cuts

The Modi administration has also had some results with taxes. The introduction of a goods and services tax (GST) is regarded as its greatest economic policy achievement. The former complex indirect tax system comprising an excise tax, service tax, value added tax, and central sales tax was often identified as a business hurdle, and after many years of consideration of the need to streamline these indirect taxes, Modi achieved just that in July 2017.

The GST system will simplify administrative procedures and bring all tax credits under one umbrella, so compared to the complex indirect tax system, a mechanism is finally in place that will increase supply chain efficiency in India.

India has had the highest corporate tax rates of all the main Asian economies, but the Modi administration has been addressing this, announcing its intention to reduce the basic corporate tax rate from 30 to 25 percent. Since 2016, the number of companies eligible for the 25 percent rate has been progressively expanded, reaching as far as firms with annual sales of up to 2.5 billion rupees in FY2018. The lower corporate tax rate should be effective in terms of encouraging foreign direct investment in Indian manufacturing to achieve the goal of Make in India.

However, because India imposes various taxes on top of corporate tax, a 25 percent basic rate still translates into an effective rate of 29.12 percent, which is still high compared to China (25 percent), Thailand (20 percent), Malaysia (24 percent) and other East Asian countries.3 The dividend distribution tax, which is unique to India, was also a steep 20.56 percent as at FY2018, so when it also includes dividend payments to parent companies, the corporate tax burden remains a heavy one, making this is an area where further reform would certainly be useful.

4. Will the Modi administration survive the early 2019 lower house elections?

The achievements of the Modi administration may have improved India's business environment, but there are also many issues left to resolve, among them nonperforming loans, state-owned enterprise reform, and trade policy. India is also highly dependent on crude oil imports, retaining its structural vulnerability to oil prices. In terms of external economic policy, eyes are on whether agreement can be reached, India included, in the Regional Comprehensive Economic Partnership negotiations in which Japan, China and ASEAN are also participating.

India's lower house elections take place in the first half of 2019. Learning from the defeat suffered by the Vajpayee administration from the same Bharatiya Janata Party (BJP) in the 2004 general elections as a result of protest votes from the rural sector, the Modi administration is also channeling resources into the rural sector and policies targeting low income earners. In the next few months, the people of India will determine whether or not Modi gets a second term.

1 According to Delhi Metro and the Japan Subway Association
2 The account ownership ratio, ratio of mobile money users, and ratio of credit card ownership are all according to the World Bank.
3 The corporate tax rate is according to JETRO.

About the Author
Kohei Shiino
Associate Professor, Faculty of International Studies, Takushoku University

Completed his Master at Aoyama Gakuin University's School of International Politics, Economics and Communication with a major in international economics. Joined JETRO in 1994, completing the Development Economist course at the International Development Center of Japan (IDCJ). Worked at JETRO's New Delhi office, going on to become Deputy Director of the International Economy Division within the Overseas Research Department, Deputy Director General of JETRO Singapore (in charge of research), and Director of the International Economy Division, taking up his current position in April 2017. His publications include Fundamental Knowledge on India's Economy: Actual Conditions and Policies of a New Economic Power (JETRO 2009), and The New Era of FTAs: Asia as the core of a broadening FTA network (JETRO 2010; co-authored).

(For the Japanese version of this article)

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