When Narendra Modi entered the Mahatma Mandir convention hall in Gujarat to open a business forum in mid-January, a sell-out crowd stood up on their feet to cheer India’s prime minister. Wearing his signature khaadi kurta, Mr Modi ceremoniously smiled before taking his place right at the centre of a dais filled with local and foreign businessmen, as well as head of states from all over the globe.

"Our biggest strength is the depth of our democracy,” he told the excited audience. “Some say that democracy cannot deliver effective and fast governance. But we have seen in the past two-and-a-half years that is possible to deliver quickly in a democratic set-up as well.”


Getting to work

After more than 12 years as chief minister of north-western state Gujarat, which is heavily industrialised, Mr Modi became India's prime minister as the candidate of the Hindu nationalist BJP party in 2014. Once in office, he worked his combination of charisma, commitment and decisive governance to combat the inefficiency and corruption that have dogged Indian politics for many years and set in motion a number of key reforms aimed at loosening up the country's economy. In addition to this was an unannounced demonetisation push, which saw the legal tender value of 90% of the banknotes in circulation in India scrapped overnight.  

Despite the contentious nature of some of his flagship measures, Mr Modi's popularity remains very high, both within the electorate at large and the business community. The likes of Gautam Adani, Mukesh Ambani and Ratan Tata represented the Indian industrial elite at the forum in Gujarat. The heads of major global corporations such as Boeing, Cisco, EDF and Suzuki were on stage too to share the optimism of the foreign investment community before the ongoing changes.

India’s need for better soft and physical infrastructure remains incredibly high, with the country faring poorly in world rankings tracking ease of doing business and competitiveness. Yet Mr Modi’s leadership, combined with the slowdown of other major fast-growing economies, is building momentum in the country. With a delicate, long-awaited fiscal reform soon to be implemented, 2017 will prove to be a key year in his quest to reform India.

A difficult environment?

For all of its improvements, India is not an easy place in which to do business. The country ranks 130th out of 190 in the latest Ease of Doing Business report by the World Bank, and in 39th place out of 138 in the Global Competitiveness Ranking published by the World Economic Forum. Nonetheless, the country has improved its profile in both rankings over the past couple of years, with the liberalisation push first triggered in the 1990s gaining new momentum under Mr Modi, and the policies of long-time BJP companion Aruun Jaitley coming to fruition in the finance ministry.

“In the past few years the government’s efforts to focus in a business-like way on the obstacles to the ease of doing business have been notable,” says Robert Blake Jr, a long-time US diplomat in Delhi and senior director for India at consultancy firm McLarty Associates. “For the first time in a long time we are seeing real progress in many of these issues.”

Overall, the Indian government has 30 key reforms active, seven of which have already been completed, another 14 of which are in the process of being completed, with the remaining nine only partially completed, according to the Centre for Strategic and International Studies, a Washington, DC-based think tank.

In the field of foreign investment alone, the government has established an automatic route for foreign investors to bypass official approval in a wide number of sectors – including investments with a 100% FDI component. On the other hand, government approval remains a requirement for foreign investment beyond certain thresholds (generally 49%) in sensitive sectors such as defence, air transport, mining, media, banking and retail.

Protectionism prevails?

However, a number of other limitations are still active in sectors such as single-brand retail trading and e-commerce, where foreign investors have to comply with strict rules, mostly concerning minimum levels of local content and technology transfer. The government has also reiterated the primacy of Indian courts over arbitration courts, making it more time-consuming for a foreign investor to settle a dispute with an Indian counterpart. And even definitive international arbitration rulings may remain subject to further scrutiny in India. Delhi reportedly blocked a $1bn-plus settlement by Mumbai-based Tata group to Japanese telecommunication group NTT DoCoMo ordered by the London Court for International Settlement to honour a previous agreement between the two companies. 

Despite such limitations, the ongoing reform process, combined with sustained economic growth of about 7% at a time when India's Brics peers are dealing with growing internal and external woes, has provided the country with a sense of optimism among foreign investors, whose activity over the past year has partially countered a sharp fall in investment by financially distressed Indian companies.

Total announced greenfield FDI in India was stable at about $62.3bn in 2016, making the country the world’s top destination for foreign investment ahead of China ($59.1bn) and the US ($48.1bn), according to figures from greenfield investment monitor fDi Markets. Manufacturing accounted for 40% of total received FDI alone, followed by construction (20%) and power (16.5%). Mr Modi has made no secret of his ambition to turn India into a manufacturing hub for the whole world – the government plans to increase the specific weight of the manufacturing sector to 25% of GDP by 2025, from about 17% today.

Taking note 

The demonetisation policy announced by Mr Modi on November 8 has been one of the more surprising twists in his reform agenda to date. The measure scrapped the legal tender of 500 rupee and 1000 rupee banknotes overnight, giving people two months to deposit them in bank accounts in an unprecedented move to clamp down on black market money and push India towards a cashless society.

The measure took a toll on the Indian economy though, as the two transition months were fraught with problems and the whole country experienced an unexpected cash crunch that weighed on both demand and investment. Added to this, in a country where 98% of transactions are done in cash, critics claim that such a move towards a cashless society is overly ambitious. India has 1.4 million point-of-sale terminals to serve more than 750 million consumers owning debit of credit cards.

“There is a tremendous opportunity to work with the government – both at national and state level – to provide technology and expertise to enable small businesses and consumers with new forms of payment and bring operational efficiency,” says Ravi Aurora, senior vice-president for global community relations at payment group MasterCard.

As the demonetisation moves settle, the coming months will see the implementation of another flagship reform, the Good and Services Tax (GST), a value-added tax on the manufacture, sale and consumption of goods and services at a national level that will replace all indirect taxes at both national and state level.

Mr Modi’s government remains confident that these reforms, once they gain traction, will propel economic growth in the country to between 8% and 10% in the mid-term. He and his government have not shied away from tough decisions. So far they appear to be paying off.