Modi's big bang reforms coming post Diwali

  • HT Correspondent, Hindustan Times
  • Updated: Oct 23, 2014 15:41 IST

The Narendra Modi government’s economic reform measures leading into Diwali — labour, diesel and coal — have lifted Indian stock markets by 3% in the last week alone. Now expect the trading New Year that begins Thursday to usher in bigger initiatives aimed at boosting investment and creating jobs.

On the cards are fresh moves to ease land acquisition rules, raise foreign investment limits in insurance and pension sector, introduce a country-wide goods and services tax (GST) and a separate labour law for small factories. The measures will likely be implemented in the Parliament’s month-long winter session to be held from the last week of November.

"We believe that policy reforms are much needed to ensure that India transitions out from stagflation to an environment of higher growth and lower inflation. Indeed, the decisive (Lok Sabha) election outcome suggests that the new government will be able to implement reforms at a faster than previously expected pace," global investment bank Morgan Stanley said in a recent research report.

The recent wins in Maharashtra and Haryana elections will only add more political power to the ruling BJP and enable it to push through reform that stock markets are likely to cheer.

“A bulging young lower-middle income group in large and small cities, with strong aspirations for upward mobility, has swelled the middle class in India. Poor GDP growth of recent years has made the middle class more favourable toward reforms, which they increasingly see as necessary for rapid economic expansion and their own continued prosperity,” said credit rating firm Standard and Poor’s.

Easing land acquisition rules is likely to be among the first of the next round of reforms. Government sources told HT that the Centre is trying to do this without hurting farmers’ interests. The highly restrictive consent clauses are proving to be a major barrier for industry to buy land as costs have jumped more than three times according to the formula stipulated in the new law enacted by the former UPA regime.

A bill to amend the insurance laws to ease FDI limit in the sector to 49% from 26% will be introduced in the winter session, the sources said.

The move, however, comes with a rider that management control of these companies will remain with Indian promoters. The higher FDI ceiling will come into force after Parliament passes the Insurance Laws (Amendment) Bill that has been pending since 2008 for lack of political consensus.

Insurers need funds to maintain a healthy capital base, offer a wider bouquet of products, protect consumer interests against insolvency and deepen insurance penetration in India.

In another major move, the government will introduce a constitution amendment bill to initiate India’s biggest tax reform initiative—Goods and Services Tax (GST) — in the winter session.

If adopted, GST can dramatically alter tax administration by giving a one-shot solution by subsuming a string of central and local levies such as excise, value-added tax and octroi into a single unified tax and stitching together a common national market.

GST’s implementation has faced political hurdles as state governments fear it could rob them of fiscal powers.

The government is also planning a separate labour law for small factories, sources said.

This will be in addition to the string of labour reforms aimed at making rules simpler and employee-friendly, remove arbitrary inspections at factories, reduce cumbersome paperwork and turn India more investor friendly.

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