17 May 2014 | Volume 6 Issue 3
Elections 2014: India set for change with a strong government

Politics has been at the centre stage in India for the last few months as the world's largest elections, with 814 million eligible voters, were to be held over five weeks from 7 April 2014. The results were announced yesterday (16 May 2014) – the Bharatiya Janata Party (BJP) has been swept to power and Narendra Modi, who has been the Chief Minister of the state of Gujarat for over 12 years, will be the next Prime Minister. These election results have been incredible in that the National Democratic Alliance (NDA), which is an alliance of several parties led by the BJP, was not expected to secure as many seats (over 300 of the 543 seats) in the lower house of Parliament. With the BJP alone winning more than the 272 seats required for a party or alliance to form a government, it is clear that India has now voted a strong and stable government to power.

What are the implications for industry and investors?

Given India's size and growing importance in the world economy, these elections will have far-reaching implications beyond India's borders. Over the last few years, India has experienced a lack of governance. Serious charges of corruption against several ministers and top leaders of the ruling Congress party and its allies worried people. A policy paralysis resulted in severe bottlenecks while doing business. Slow decision-making on foreign direct investment (FDI), income-tax amendments, etc. led to a loss of confidence among domestic and foreign investors. High inflation, a weak Indian Rupee and slow growth in GDP and exports added to the woes of Indian businesses.

What we see in the days ahead is strong governance. With the BJP's focus on 'Minimum Government, Maximum Governance', they aim to increase transparency, establish systems to eliminate corruption, and give greater autonomy to states, which is essential for swift decision-making.

The Indian economy, which has grown at a slower pace over the last few years, is now expected to witness a turnaround. In financial year 2013-14, real GDP grew by a slow 4.86%, mainly due to sluggish industrial growth of only 0.65% during the year. The Index of Industrial Production (IIP) fell by 0.1% in 2013-14 compared to the previous year. Inflation has been high with the Consumer Price Index (CPI) up by 9.6% in 2013-14. While these are structural issues that cannot be fixed instantly, one hopes that Modi's business-friendly image translates into concrete steps to spur economic growth and regain investor confidence.

The BJP manifesto talks about creating an environment that makes doing business in India easy. It aims to make India a global manufacturing hub by eliminating red tape, simplifying procedures, having a single-window system for clearances, and setting up world-class industrial regions.

The World Economic Forum's Global Competitiveness Report 2013-2014 ranked India 85th of 148 economies for insufficient infrastructure. Recognising the need to build infrastructure, the BJP will focus on removing bottlenecks, expediting work on freight and industrial corridors and modernising the rail network, ports and airports. Public-private partnerships will also be encouraged.

With respect to FDI, it will be encouraged in sectors wherever needed for job and asset creation, infrastructure and acquisition of niche technology and expertise. The functioning of the Foreign Investment Promotion Board (FIPB) will be made more efficient and investor-friendly. The new government is also likely to encourage FDI in selected defence industries. While the BJP manifesto talks about barring FDI in multi-brand retail in order to protect the interests of small and medium retailers, this ban is unlikely to be tackled immediately.

With a strong and stable government in the saddle, we see changes in laws. We hope the BJP's aim to rationalise and simplify the tax regime brings finality to the existing tax-related ambiguity. The much-awaited Goods and Services Tax (GST) is expected to see the light of day soon and we hope the overhauling of the Income Tax Act, 1961 will also materialise soon. People are also looking forward to better implementation of existing laws – implementation that is fair and just, and does not drag its constituents into long and arduous litigation.

Economic inclusion for all is also vital in a country where more than 400 million people still live in poverty. The BJP manifesto addresses issues such as reducing poverty, providing education and skill training, employment generation, modernising agriculture, empowering women and minorities, improving the quality of healthcare while lowering cost, etc.

The party's thrust to manufacturing, infrastructure and developing labour-intensive sectors such as textiles, infrastructure, tourism, etc. is expected to boost job creation – an important issue as India will soon have the largest and youngest workforce the world has ever seen, according to the World Bank. With some 10 million people expected to join the workforce every year, the BJP plans to set up 100 new cities equipped with the latest technology and infrastructure.

The future seems bright

While the country's growth potential was always high, the right policy and structural reforms that improve the business environment will truly help transform the economy. A strong government would be a stable one that does not have to worry about its alliance partners stalling important amendments. The long list of essential but overdue items on the government's agenda means there is little time to waste. The new government will have to hit the ground running and restore faith in India as a destination for global investments.

While implementation is crucial and we will see the impact of policies only over time, the perception of Modi being an action-oriented leader has been a key driver of the overall optimism. Indian stock markets have already celebrated this victory of democracy with the indices scaling unprecedented heights.

As days go by and the new government will take firm steps to put the faltering economy back on track, we look with optimism towards a vibrant and prosperous India on a higher growth path.?

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ABOUT THIS BUSINESS ALERT
This SKP Business Alert contains general information existing at the time of its preparation only. It is intended as a news update and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or opinion or services. This business alert is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional adviser and also refer to the source pronouncement/documents on which this business alert is based. It is also expressly clarified that this business alert is not a solicitation or an invitation of any sort whatsoever or a source of advertising from SKP Group or any of its entities to create any adviser-client relationship.

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