By Frank-Jürgen Richter
Narendra Modi is no scientist, but he is in fact conducting the world’s largest every experiment. At the helm of history’s largest democracy in history, 2018 will determine whether 1.3 billion people can continue to cooperate in a capitalist democracy, and whether his ambitious economic reforms will continue beyond the 2019 elections.
The battleground for this experiment will be fought in rural India. National growth is high at around 7%, but the majority of voters living in impoverished rural India must feel ownership of these gains if Mr. Modi is to be re-elected. This means a rapid transition from the primary sector (agriculture) to the secondary (industry) and then to the third sector (services).
Employment in India is wedded to the outdated regulatory and legal environment that has constrained business, innovation and entrepreneurship. Mr Modi knows he cannot single-handedly resolve these issues- he needs to collaborate with legions of administrators and legislators across the country, including entire state governments, to change the system.
His new GST regime, which came into effect in June, has taken the first step towards creating a single Indian market for the first time. Now, three challenges will shape Mr. Modi and this new market’s destiny in 2018.
One will be attracting foreign direct investment. A new FDI policy was announced in September, set to come into action fully in 2018. He has tasked the government with removing layers of bureaucracy, cutting red tape and simplifying the process of investing in Indian business from abroad. This will be no easy feat- the World Bank’s 2018 Doing Business report ranked India 100th out of 190 countries in ease of doing business. The abolition of the Foreign Investment Promotion Board may bring cheer to foreign investors who dealt with that body- but it will take hard work to make sure the new ‘Foreign Investment Facilitation Portal’ (FIFP) is not just as restrictive.
India’s state has also long resisted inward investment in certain industries to protect local players. In fact, recent directives from the PMO’s office to government departments to favour local vendors for tenders are likely to impact FDI negatively. This means reduced competitiveness – outside influences sharpen local skills. Presently in key industries like IT, it is Western firms breaking new ground, with Indian companies falling behind. Mr Modi’s pressure to open up India to investment would increase competition and effectiveness throughout Indian business.
The second will be encouraging entrepreneurship and stopping the legal challenges that so many entrepreneurs have been facing. A litmus test is right around the corner in January 2018, when India’s Supreme Court will rule in a case related to direct selling. It is high time India, like so many other countries in the world, authorised and regulated an industry which is absolutely crucial in fostering entrepreneurship. In the words of Nobel Laureate Dr Muhammad Yunus, the priority is now to lift people from ‘job seekers to job creators’.
The third challenge will be a continuation of Modi’s battle with India’s gargantuan tax code, to be undertaken in the government’s last full budget in February. Here again he has signalled major changes, proposing a further simplification of the code and a cut for individuals and for corporations from 30 to 25% in an attempt to encourage native businesses to invest. A cut in corporate tax will also depend on revenue outlook for GST in the first fiscal quarter- collections have fallen in recent months, and concerns about India’s fiscal deficit are mounting.
These three challenges will play an oversized role in determining the outcome of Mr. Modi and by extension India’s grand experiment- the world watches on. I am confident that India under Mr Modi’s leadership will succeed in its economic and social transformation.
The author is Founder and Chairman of Horasis, the global visions community which hosts the annual Horasis India Meeting.