On June 18th, Raghuram Rajan announced that he would soon step down from his position as governor of India’s central bank. After a week, United Kingdom decided to leave the European Union through a popular referendum whose consequences are now clearer than ever.
At a glance, Indian Prime Minister Narendra Modi has apparently done a fair job since its election in 2014; the level of corruption and bribery has decreased drastically according to the Corruption Perception Index (CPI) score which increased by 2 points in 2014 from its 2013 score; a useful bankruptcy law has been approved, giving banks a further control over insolvent companies unable to repay their debts; sectors such as railways and defence opened, facilitating the inflow foreign direct investment (FDI) during a period when investors were going away from emerging markets. Overall, the economy grew by 7.9% in the first quarter thanks to a mix of lower oil prices and prudent fiscal policies.
However, the country has still a high contentiousness with chronic overloading of courts, resulting in lengthy trials. The costs of justice are quite high, and his administration can vary from state to state. Moreover, the Congress party has repeatedly blocked the imposition of a goods-and-services tax preventing the creation of a single market among India’s huge people.
From a commercial point of view, significant barriers protect the Indian market. The phytosanitary legislation is not in line with international standards and for other products is necessary to test requirements and mandatory certification of compliance with Indian standards, which exceed foreign ones. Procedures for inspection and licensing may disclose non-transparent, long and cumbersome. The legislation is often complex and opaque as a corollary of a bureaucratic system of permits and licenses heavy and slow, easily corruptible. Exports remain weak and public-sector banks (which hold 70% of the industry’s assets) are stuffed with bad loans precluding any potential increase in productivity as the company has lost the path of economic expansion.
Finally, an old-fashioned retroactive taxation system together with a ridiculous effort to make labour laws more flexible is a nuisance for foreign investors.
Generating jobs for the 1.1m Indians joining the job market every month looks like an unattainable dream; most will end up in the black market where wages are just a tenth of those in the official sector so that tax-dodging is proliferating (by the way, 49m pay income-tax payers out of a population of 1.2 billion).
Analysing the entire situation, a possible solution could be that of privatisation of particular industries. In fact, the government owns banking and insurance companies but also hotels, airlines and a large number of utilities. In a nutshell, Mr Modi’s reform goals are far from achieved: most of the changes announced by the government in the main sectors like aviation, retail, defence and pharmaceuticals are about reducing bureaucratic restrictions: ministers are running industries rather than regulate them.
The country should increasingly focus on activities with higher added value and continue to pursue the virtuous decision to develop its own internal market for growth through an increase in the purchasing power of citizens and investments in public education, environmentally friendly infrastructure and public health on behalf of the profound ambitions of the country and the public interest.