Three years of the Modi govt have spurred growth but some areas of concern remain
The first three years of Modi government have seen the building of a steady foundation to bolster the country’s economic and social outlook in the eyes of the world. Flagship initiatives (Jan-Dhan Yojana, Make in India, Smart Cities Mission, Digital India, Skill India) and landmark regulatory reforms (Insolvency and Bankruptcy law, liberalisation of FDI policy, GST) have provided a robust policy and institutional architecture for tackling the growth inhibitors.
On Independence Day last year, Prime Minister Modi had put forth ‘Reform, Perform and Transform’ as the government’s core working mantra; whilst the government has conceived multiple policy measures embodying this theme, the implementation efficacy remains to be measured.
In the context of foreign investment policy, the Finance Minister’s announcement (in the 2017 Budget) regarding further liberalisation of the FDI Policy, alongside dismantling of the Foreign Investment Promotion Board, is a progressive decision. The spur in FII investment in 2017 is an indication of growing confidence putting aside fear of the new US Trump administration’s monetary policy stance. Whilst the rising tide of protectionism could slow down India’s climb on the ‘preferred investment destination’ index, timely decisions for tackling global dynamics would help shift gears.
A related point is impact assessment of the ‘ease of doing business’ initiative — despite multiple policy initiatives deployed by the government, India’s current ranking at 130 (out of 190 countries) is far from Prime Minister Modi’s vision for India featuring in the top 50. Considering that agriculture continues to be the centrepiece of the Indian economy, the government’s focus to boost agriculture and doubling farmers’ income by 2022, is right on cue.
Recently, the NITI Aayog released the (draft) Three Year Action Agenda (2017-18 to 2019-20), setting out proposals for policy changes across different sectors. In the context of agriculture, the Action Agenda outlines a four-pronged action plan (viz, reforming agricultural produce marketing, enhancing productivity, reforming agriculture land policy and relief measures). Successful implementation could bolster the rural economy (accounting for 48.9 per cent of total workforce as per NSSO data for FY 2011-12), and contribute to rise in demand.
On the infrastructure development front, a policy push is required to spur capital formation, though several stalled projects have taken off. Supplementing enhanced government spending, public-private partnerships and mechanisms for resolution of disputes in infrastructure-related contracts will boost project activity and encourage higher private investment.
Another critical aspect for the government to evaluate is whether India’s growth story entails commensurate increase in job opportunities. The 5th annual employment-unemployment survey conducted by the Labour Bureau reveals that for 2015-16, the unemployment rate in India stood at 5 per cent, highest in the last five years.
Whilst the Action Agenda sheds light on key intervention areas for job creation and specific action points for sectors with high employment potential, employment presents a challenge of sorts for the administration.
Post demonetisation era
The landscape has seen most developments in the post-demonetisation era, with a plethora of legislative and administrative measures which will be supplemented by rigorous compliance requirements, with the objective of improving transparency, expanding tax base and effectively dealing with the menace of unaccounted wealth.
Tax reforms for India Inc and foreign investors are unfolding rapidly — whilst on the global front, advent of BEPS is likely to impact the established business practices, Indian domestic tax laws too are in the midst of an evolution phase with the GST regime, GAAR provisions and POEM rules gradually coming into effect.
The Union Cabinet’s decision to approve signing of the OECD-G20 led BEPS multilateral convention by India will trigger amendments to tax treaties with an aim to curb treaty abuse and facilitate ease in exchange of information for cross-border transactions.
It is critical that the tax administration exercises caution in its approach for application of the new laws, so as to mitigate the incremental burden on taxpayers and not impose onerous obligation. Also, the government needs to ensure that the dispute resolution framework is sufficiently equipped to resolve disputes between tax authorities and taxpayers, particularly treaty partners.
In the backdrop of its promise of a clear and non-adversarial tax regime, with recent changes in tax laws, it appears that the government has a host of aspects to review before its last full Union Budget (in 2018).
It would be fair to say that the government’s performance is marked by two key attributes — mature policy thinking and boldness to chase steep objectives. As the government steps into its penultimate year, a communiqué has been issued by the Ministry of Information and Broadcasting for collating details of major achievements/ reforms since the government took over the reins. Given the last three years’ experience, it would be reasonable to expect that this exercise would not be restricted to resting on laurels but would also contribute to charting out the roadmap for the distant targets it has set its sight on.
*With inputs from Vishwendra Singh and Gaurav Sharma
Founder & Managing Partner of BMR Legal
Mukesh Butani is Founder & Managing Partner of BMR Legal setup in 2010. With specialization in domestic corporate international tax and transfer pricing, he has over three decades of experience in advising multinationals and Indian conglomerates on a wide range of matters relating to FDI policy, business re-organizations, cross-border tax structuring, tax controversy and regulatory policy across a range of sectors. He has led International Tax & Transfer Pricing practice for 2 of the Big 4 firms and was Co-founder & Tax Practice Leader of BMR Advisors leading transaction advisory a firm that transitioned into big 4 firms in 2017. He is an acknowledged expert in the area of International tax policy, controversy & Advocacy. He has to his credit several judicial pronouncements, laying down landmark principles of law, bilateral APAs & MAPs with various jurisdictions. He has deposed as an Expert Witness on contentious cross-border tax treaty & TP matters in foreign jurisdictions.