The Modi Government's Reform Program: A Scorecard

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Cover photo by: Owen Young

Pundits sometimes act as if “economic reforms” are a light switch that India’s central government can turn on and off. In reality, the process of reforming the economy is nuanced, involving a diverse set of issues and actors. The following scorecard is a list of thirty big reforms that the Modi government confronted when it took office, and the status of each. Such a list can never be absolutely definitive, and we welcome the feedback of others. We hope this list helps the public understand the choices that are on the table, and that each reform will move at an independent pace. This scorecard will be updated on a monthly basis as we see tangible progress on individual reforms.

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REFORMS BY SECTOR

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  • Completed   

  • Incomplete   

  • In progress/partial success   

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Create a unified national tax on goods & services

In Progress

DIFFICULTY: High

Will combine most of India’s state and local taxes into a streamlined tax system.

The GST Council has cleared drafts of all five implementing laws. The bills must now be approved by either the state or central legislatures.

End retrospective taxation of cross-border investments

In Progress

DIFFICULTY: Medium

Eliminate the Revenue Department’s ability to retrospectively apply new tax laws. This provision, introduced in 2012, creates uncertainty for foreign investors.

In his February 29 Budget Speech Finance Minister Jaitley announced that the Revenue Secretary would chair a high-level committee that had to approve all retrospective tax demands and offered a one-time dispute resolution opportunity for parties to current cases.

Deregulate Diesel Pricing

Complete

DIFFICULTY: Medium

Deregulating diesel pricing will lower government subsidies and also encourage the expansion of private hydrocarbon production.

The government deregulated diesel pricing on 10/18/2014.

Deregulate Natural Gas Pricing

In Progress

DIFFICULTY: Medium

Deregulating natural gas pricing will encourage the expansion of private hydrocarbon production.

On March 10, the Cabinet announced a new energy policy that switches to a revenue-sharing model (from a profit-sharing model), allows substantial pricing freedom for difficult fields, and eliminates minimum acreage requirements for new fields. While not total price deregulation, the policy offers new incentives for private hydrocarbon exploration.

Deregulate Kerosene Pricing

Incomplete

DIFFICULTY: High

Deregulating kerosene pricing will lower government subsidies and also encourage the expansion of private hydrocarbon production.

The government has authorized public sector oil marketing companies to increase the price of kerosene by .4 cents a liter each month for the next 10 months.

Remove government-mandated minimum prices for agricultural goods

Incomplete

DIFFICULTY: High

Removing minimum support prices will reduce the government’s subsidy burden and help end the over-production of staple grains.

Use Direct Benefit Transfer to deliver cash subsidies

In Progress

DIFFICULTY: Medium

Direct cash payments programs, such as pensions, should employ Direct Benefit Transfers to send funds to recipients.

The government is testing a pilot program for providing subsidies via DBT to fertilizer manufacturers in 16 districts.

Use Direct Benefit Transfer to deliver goods subsidies

In Progress

DIFFICULTY: High

Programs where the government broadly subsidizes goods for targeted groups should be shifted to Direct Benefit Transfer programs to strengthen targeting and reduce diversion.

Direct Benefit Transfer for kerosene subsidies is being implemented in 39 districts over the current fiscal year.

Deregulate Fertilizer Pricing

Incomplete

DIFFICULTY: High

Deregulating fertilizer subsidies will lower government subsidies, increase private investment, and reduce over-fertilization that can erode soil viability.

On 5/13/15 the government announced a new four-year urea policy that will continue the price regulation regime.

Allow more than 50% foreign investment in Insurance

In Progress

DIFFICULTY: High

Allow foreign investors to own a majority stake in life and non-life insurance firms.

In his February 29 Budget Speech Finance Minister Jaitley announced that FDI in insurance will be automatically allowed up to the sectoral cap of 49%.

Allow more than 50% foreign investment in Defense

In Progress

DIFFICULTY: Medium

Allow foreign investors to own a majority stake in defense production firms.

The Ministry of Defence rejected the first-ever proposal to establish a 100% foreign-owned defense manufacturer in India.

Allow more than 50% foreign investment in Railways

Complete

DIFFICULTY: Low

Allowing foreign investors to own a majority stake in the railway-related businesses will encourage much-needed investment in infrastructure.

DIPP Press Note 8 (2014), issued 8/27/2014, opened most of the railways sector to 100 percent FDI.

Allow foreign lawyers to practice in India

Incomplete

DIFFICULTY: High

Allowing foreign law firms to establish offices and practice law in India will lower barriers to doing business in India.

The government amended regulations governing Special Economic Zones (SEZs) to allow the practice of law in SEZs, perhaps opening the door to foreign law firms setting up outposts there.

Allow foreign investment in more construction projects

Complete

DIFFICULTY: Low

Relax the rules specifically governing foreign investment in construction projects, including minimum built-up space and lock-in periods.

DIPP Press Note 12 removed almost all restrictions on FDI in construction, including minimum project size, and reduced the lock-in period for capital to three years (or as soon as trunk infrastructure is completed, whichever comes first).

Reduce restrictions on foreign investment in multi-brand retail

In Progress

DIFFICULTY: Medium

FDI was opened in Sept. 2012. But rules governing foreign investment — minimum investment size, sourcing rules, and location — have precluded investment in this sector.

Reduce restrictions on foreign investment in single-brand retail

In Progress

DIFFICULTY: Medium

FDI in single-brand retail was opened in September 2012. However, foreign firms must source 30% of what they sell from local manufacturers.

Press Note 5 of 2016 allows FDI up to 100% via the government approval route, but requires that 30% of goods sold in the first 5 years be manufactured in India. This period is tolled 3 years for 'cutting edge' technology.

Allow more than 50% foreign investment in direct retail e-commerce

In Progress

DIFFICULTY: Low

While FDI is allowed in business-to-business e-commerce, and in e-commerce that uses a marketplace model, the sector is still closed to FDI when companies sell directly to consumers.

Press Note 3 of 2016 clarified that FDI is not allowed in business-to-consumer e-commerce, unless items are all being sold under a single brand and meet local-content requirements.

Fully open the coal mining sector to private/foreign investment

Complete

DIFFICULTY: Medium

Coal mining for public sale was previously the exclusive right of government-owned “Coal India” and its subsidiaries.

Parliament approved the Coal Mines (Special Provisions) Act, 2015 on 3/20/2015, opening the sector to private—including foreign—investment.

Relax government controls over corporate downsizing

Incomplete

DIFFICULTY: High

India’s Industrial Disputes Act sets a floor of 100 employees after which government permission is required to lay off workers. Some firms choose to remain below this level, giving up growth opportunities, in order to retain flexibility.

Stop forcing banks to lend to “priority sectors”

In Progress

DIFFICULTY: Medium

Banks are required to direct 40% of loans to "priority sectors", including agriculture, small businesses, education, and housing. This slows growth by reducing capital available for the fastest-growing industries.

On April 7 2016 RBI put into effect a new scheme that allows banks to trade priority lending certificates, thus avoiding the requirement that they lend in sectors where they have little expertise or interest.

Establish processes for thoughtful financial regulations

In Progress

DIFFICULTY: Medium

In 2013, the Financial Sector Legislative Reforms Commission called for stronger rules for regulatory interventions. This includes clearly stating the purpose of new regulations, mandatory notice & comment periods, and impact studies.

The Ministry of Finance recently solicited comments on a Task Force Report proposing the structure of a new Financial Redress Agency (FRA). First recommended by the FSLC, the FRA that will act as a consumer regulator of the financial services industry.

Make it easier to for states to use eminent domain to purchase land

In Progress

DIFFICULTY: High

The current law governing eminent domain requires that states obtain approval from at least 80% of residents before buying land, making it difficult to find plots for industry and infrastructure.

The new national land acquisition law, although it passed in the Lok Sabha, failed in the Rajya Sabha, and the government is no longer making this issue a legislative priority.

Extend the expiration date of industrial licenses

Complete

DIFFICULTY: Low

Onerous licensing is one aspect of India’s difficult “doing business” environment. Extending the validity of industrial licenses will decrease the frequency businesses will need to undertake this exercise.

DIPP Press Note 9 (2014), issued on 12/20/2014, increased the maximum validity of an industrial license from two years to seven years.

Make it quicker and easier for companies to go through bankruptcy

Complete

DIFFICULTY: High

India’s laws do not allow for a quick resolution of dead companies. The long process of winding up bankrupt companies contributes to overall legal paralysis, and locks up assets and intellectual property that could be deployed elsewhere.

The first case under the new Insolvency Code has begun in the Maharashtra High Court.

Offer one-stop shopping for clearances for new businesses

Incomplete

DIFFICULTY: Medium

The World Bank's Ease of Doing Business Report 2017 notes that it requires 12.9 procedures to start a business in India, compared to the South Asia regional average of 8.1.

Ensure that business owners can receive a permit in 10 days or less

Incomplete

DIFFICULTY: Medium

According to the World Bank's Ease of Doing Business Report 2017, it takes 26 days to start a business, more than in any other country in South Asia.

Institute a mandatory 30-day "Notice & Comment" period for proposed regulation

In Progress

DIFFICULTY: Medium

A consistent, transparent regulatory environment gives businesses greater confidence.

The Ministry of Law & Justice sent a letter on 2/5/2014 to all ministries, urging them to comply with a 30 day notice & comment period and other rules. Implementation has been inconsistent.

Allow cities to issue municipal bonds to raise funds

Incomplete

DIFFICULTY: Medium

Creating the policy, legal, accounting, and reporting framework for local governments to issue municipal or project revenue bonds will spur the creation of this financing option.

Pune, in Maharashtra, is planning a bond issue of $350 million, but this is not the result of any new policy incentives by the central government.

Raise the ceiling on foreign institutional investment in Indian companies

Incomplete

DIFFICULTY: Low

The long-standing 10% limit on single institutional investors hinders investment in high-growth Indian companies. SEBI raising this threshold — even to 20% — will unlock significant liquidity for listed Indian companies.

In his February 29 Budget Speech Finance Minister Jaitley raised the investment limit for foreign portfolio investors in public sector enterprises from 49% from 24% and allowed FPIs up to 100% of each tranche of securities released by asset reconstruction companies. Neither change has yet been notified by RBI.

Conduct transparent auctions of telecom spectrum

Complete

DIFFICULTY: Medium

Government must conduct auctions in a way that allocations of the spectrum being auctioned off are transparent and create a barrier to participation.

India has now conducted multiple free and fair telecom auctions with no complaints from private-sector participants.