The current Business Climate in India: Is it conducive for growth?

The past few years have not been very favourable for India. With Gross Domestic Product crawling at less than 5 percent and the burden of huge fiscal deficit on its shoulders, the growth story of India was not something to be proud of. India was no longer shining.

Everyone was looking forward for a change and the expectation from the newly elected Narendra Modi government that came to power in May 2014 was immense. Not just India but the whole world waited to see the steps that the new government would take, especially the Budget that it would present.

The Budget was presented on July 10 2014 by Finance Minister, Arun Jaitley. It was hailed by many in the market as a please-all Budget. Though it did not deviate much from the previous United Progressive Alliance (UPA) government in terms of direction, many were of the opinion that this was the best that could have been done under given circumstances. While some investors found it to be a decent budget that would promote growth, others were disappointed that the radical reforms they had expected out of the Budget was missing.

Here are few points why some feel the current business climate is conducive for growth, while others don’t agree:

Why people feel the business climate is conducive for growth?

Single majority
The biggest positive about the new government is that it has secured a clear majority by bagging 300 seats. This means that the National Democratic Alliance (NDA) government led by the Bharatiya Janata Party has a definite say and may not have to compromise or give into the demands of the coalition partners every now and then. One of the biggest drawbacks with the previous UPA government was that it often had to bow under the pressure of coalition partners. This acted as an impediment in the path of economic reforms.

The new government, many feel, is unlikely to face a similar situation and the economic reforms that Prime Minister Modi had talked about during his election campaign may actually see the light of the day, thus promoting economic growth in the country.

Raising the cap of FDI in insurance
The newly elected government’s go-ahead to raising the Foreign Direct Investment (FDI) cap from 26 percent to 49 percent in the insurance sector has brought lot of cheer to the market, especially in the cash-strapped insurance sector. This move, which allows the raise in cap even while the management control lies with the Indian entity, is expected to attract long term capital and will improve the overall investment scenario in the country. This proposal had been pending since 2008.

Overall investment sentiments in India
In a survey conducted among the fund managers, the result showed that most of the respondents felt that the investment mood in India is going to improve in the coming two to three years. They felt the economy may grow in single digit now but would gradually improve over a long period. They also expected the GDP to be less that 6 percent in 2014-15 and the inflation to be between 7 to 8 percent.

Why people feel the business climate is not very conducive for growth?

Stand on retrospective taxation
The retrospective taxation which was introduced in the UPA government had come under lot of flak from the BJP before they were elected to power. Hence, the market was hoping that the taxation would be scrapped altogether in the new Budget. However, Arun Jaitley did not scrap it but assured that fresh cases of retrospective taxation would be scrutinised by high level committees. That was any relief. Retrospective taxation has been termed by many as tax terrorism that is scaring the foreign investors away. The most famous case being that of Vodafone, which is caught in a USD 2.2 billion taxation row with the Indian government over the acquisition of Indian mobile assets from Hutchison in 2007. With nothing much being done about this issue, the foreign investors continue to eye India with wary eyes.

Inflation continues to be dirty
The consumer price inflation has been one of the biggest challenges for the government. It seems to have dropped to 7.3 percent from the 8.3 percent in May. This is the lowest level the inflation has reached since it started rising in January 2012. However, this news is not much of a comfort and prediction has it that the inflation would continue to fluctuate between 7.7 and 7.5 percent this year before going down to 7 percent next year. The Reserve Bank of India may also leave its policy unchanged at 8 percent. That is not exactly helping boost the investors’ spirits.

Sentiments low after the Budget
Most of the investors were looking at the announcement of radical reforms in the new Budget, but they admitted that they were left disappointed. They felt that the new government may not be able to achieve the fiscal deficit target of 4.1 percent of the GDP and were of the strong opinion that until they don’t see the Modi government take some concrete and substantial steps to carry out the economic reforms that they were talking about, they are going to be cautious about investing in India.

To conclude, while the business scenario in India is being viewed as positive by many, there are others who feel otherwise. Having said that there is definitely an underlying hope that the new government would usher in steps in the coming years that would once again put India in the growth trajectory.