India needs bold economic reforms

"Bold reforms after Indian elections"

Prime Minister Modi's opening speech in Davos and his plea for free trade was followed by the introduction of punitive tariffs on certain products a few weeks later as part of the presentation of the new budget. How do you assess this action and is a reversal of thrust in Indian liberalization policy to be expected?

Thomas Hundt: The talk of Modi in Davos was misinterpreted. He did not advocate free trade, but only stated that protectionism is rising and new types of trade barriers are emerging. He said not to isolate yourself and implement smart, flexible policies. So he kept options open. Eight days later, his finance minister, Arun Jaitley, announced numerous tariff increases to protect domestic industry from imports from Asia, mainly China. Jaitley admitted the measures can be called popular. After all, it will be the last budget before the 2019 elections. I assume that India will switch the thrust lever back to courageous reforms and liberalization after the elections.

In the summer of 2017, the long-awaited Goods and Services Tax was introduced in India, making the country a unified domestic market. How are the first months after the bumpy start to be assessed and what is the current status?

Thomas Hundt:
When I ask entrepreneurs whether they would like to have the old system of 17 different taxes back, they clearly say no. The start was indeed confused. On the one hand, the provisions for VAT were only announced shortly before their introduction on July 1, 2017. Companies and offices hardly had time for the changeover. On the other hand, India has introduced a tax that is very complex by international standards, with five different tax rates and many exceptions. The reimbursement of input tax currently takes a long time and causes problems. Everything indicates that the tax council will continue to improve the groundbreaking reform. The World Bank says the Goods and Services Tax is just the beginning of a process, not the end.

Nationwide parliamentary elections will take place in India in spring 2019. Which scenarios do you think are possible?

Thomas Hundt:
Experts and journalists agree that Prime Minister Modi and his BJP party will win the upcoming election. The prognosis seems simple, after all, the BJP won the last state elections. The economy is booming, the state is subsidizing many areas and investing in infrastructure, and foreign investments are also flowing. So why should the electoral trend reverse? However, the mood among consumers and business people is not as euphoric as the good economic data suggests. Public banks and many state-owned companies are in dire straits and rescuing them could be very expensive. Small firms have suffered from the November 2016 cash reform and are still moaning about the new VAT. However, elections are decided in the countryside, where two thirds of the population live and work. There are factors of their own that decide between victory and defeat. For example the water supply or agricultural prices.

Thomas Hundt

Thomas Hundt is a correspondent for Germany Trade & Invest in New Delhi.