Reforms Are The Urgent Need Of The Hour

The Indian equity markets are in doldrums with most of the indices declining consistently after a brisk upward movement in January and February. The reasons are many. Inflation has consistently been above the comfort zone. No wonder it has kept the interest rates at a higher level. The impact of the same was expected in terms of slower capex by the companies and ultimately slower growth for India Inc. However, apart from these factors, one factor that has impacted the growth mainly is something else. Policy paralysis has been the issue which has impacted the overall growth cycles of India Inc. Rather, the UPA II government, which recently celebrated its so-called successful three years in power, has been blamed for the poor policy decisions. The reforms process was stalled with opposition from allies like TMC and DMK. Be it the case of FDI (foreign direct investment) in retail or petrol price hike, the UPA always found itself in troubled waters.

Now, a few days back, despite opposition from the ally parties, the government has gone ahead with a hike in petrol prices. Now everyone on the street is expecting the government to put the reforms process on fast track. But what kind of reforms are we looking at? Let’s discuss few of them which are directly related to the stock market. The reforms in the form of pending bills as FDI in retail, DTC (direct tax code), GST (goods and services tax) and the much-awaited banking sector reforms are still pending and haven’t seen daylight. Going ahead we have discussed a few of these in detail.

First is the FDI in retail. Consent to multi-brand FDI in retail can somehow ease dried foreign investment and bring back global investors’ faith in India. The retail sector is the largest source of employment after agriculture and has deep penetration into rural India, generating more than 10 per cent of India’s GDP. As per the agenda, multi-brand entities will have to bring in an investment of USD 100 million (Rs 550 crore). This will ultimately support the Indian rupee to recover from all-time lows. The biggest beneficiaries would be the small farmers who will be able to improve their productivity and realisation by selling directly to the large organised players and therefore disengage the current value chain.

The bill was opposed due to allies’ belief of fear of job losses, procurement from the international market, competition and loss of entrepreneurial opportunities.  If the government is prepared to handle these issues, multi-brand FDI in retail will ensure adequate flow of capital into the country and its productive use. It would also help bring about improvements in the income of the farmers and agricultural growth as well as assist in lowering consumer prices’ inflation.

Subsequently, there are the DTC and GST bills that have been delayed. DTC was delayed due to unclear vision on international taxation and the inclusion of General Anti-Avoidance Rule (GAAR). The government needs to indulge in a little more ground work before the implementation of the DTC, including GAAR.

On the other hand, GST, which is practiced in around 150 countries in the world, can do away with differential taxation of goods and services and develop a harmonized consumption tax system in India. Many issues are still being debated with regard to the formulation and implementation of the GST - whether there should be separate GSTs at the state and centre, whether certain items should attract a lower rate of taxation, etc. In Finance Minister Pranab Mukherjee’s own words, GST is expected to boost the country’s economic growth by about 2 per cent.  Furthermore, GST is seen as the single most important indirect tax reform initiative in India since independence.

Recently the Union Cabinet approved the banking bill with the provision that the voting right cap for foreign investors in private banks will be raised from 10 per cent to 26 per cent. But the course of action for the implementation of this bill is still to be decided as the voting rights of investors may increase in phases. This bill is expected to increase capital inflow in the banks by providing an incentive to a large number of shareholders who hesitated from increasing their holding just because their voting rights remained the same. Due to uncertain implementation, the approval of this bill has not created that much significance in foreign investors’ eyes.

We feel that the need of the hour is fast track reforms process. The passage and proper implementation of all these bills is expected to construct a new era of reforms in India. This is an urgent issue for the country in order to have a sustained high rate of economic growth.