Expectation is that reforms will continue, but it may not be as simple as that: Ketan Dalal

Ketan Dalal, Managing Director of Consulting Firm Katalyst Advisors, talks about the likelihood of reforms taking a backseat now.

Will reforms take a backseat?
We now have a BJP/Modi-led coalition Government in place, and several key ministries are in the same hands as they were earlier, including finance. The reality, however, is that this is a coalition Government with the support of JDU and TDP and other allies, and the question is whether, in this context, several critical and long pending reforms will take a back seat. The general expectation is that reforms will continue, but perhaps the answer is not as simple as that, because there could be fiscal implications of some of the reforms, which also may have differing perspectives of coalition partners, and most importantly, the relative compulsion to be consultative and accommodative, at least to some extent. One would hope, of course, that this new dispensation would lead to well-thought-through decision-making, but the next year or so will provide the answers.

Let’s take a look at some key areas where reforms are needed, but could be impacted; a crucial area of reforms is that of land reforms, given the need to promote India as a manufacturing hub and to leverage the China + 1 opportunity. In fact, before the elections, the Finance Minister had indicated that reforms in all factors of production, including land, labour and capital would be a crucial aspect that the Modi Government would be addressing. It has also been widely reported that before the election results were out, several reforms have been planned to rival Chinese manufacturing, and one of the big challenges is acquiring land, which obviously one hopes will be addressed expeditiously even in this new political dispensation also; however, the issue is whether this initiative will slow down. Additionally, digitization of land reforms is also crucial, but that may be relatively less contentious and hopefully that aspect should not slow down.

The other factor of production obviously is labour; we have seen that some labour reforms have been approved by Parliament in 2020, but have not been implemented. 29 Central labour laws were amalgamated and rationalized into 4 labour codes, namely the Code on Wages 2019, the Industrial Relation Code 2020, the Code on Social Security 2020, Occupational Safety Health and Working Condition Code 2020. It is important to recognize that India’s labour productivity is low, and other costs (eg power) are high, and rivalling China with these issues is anyway a daunting task, to put it mildly; without labour reform, it may remain more of a wish. In this context, one hopes that these labour reforms will also be operationalized, but this is likely to be a relatively contentious issue which may not happen as quickly as one would have hoped.

The manufacturing agenda being most crucial for employment, the 3rd factor of production is capital. In fact, the Chief Economic Advisor, Nageswaran did mention last month that capital market reforms have been one of the most successful interventions of the Government in the last 3 decades, but now much more needs to be done in the significantly evolving market scenario. India’s upcoming inclusion in the JP Morgan EM Bond Index from June 2024 and the Bloomberg Bond Index from January 2025 are expected to lead to greater inflows of debt fund from abroad; however, several other aspects need to be addressed and capital market reforms would be crucial. In this context, one hopes that over legislation which may have the good intent to protect minority investors is not overdone; in any case, it now remains to be seen as to how capital market reforms will evolve under the new political landscape.

Another crucial area would be of disinvestment. PSUs have done extremely well in the last few years, but disinvestment/larger public holding not only brings in more resources to the Government, but also makes the PSUs more accountable and that itself can boost performance. The issue is whether disinvestment will slow down; IDBI, SCI and BML which are otherwise, on the anvil could be impacted and in so far as BPCL is concerned, it has already been stated that the disinvestment is not likely to happen albeit for different reasons. Incidentally, an excellent asset monetization initiative was announced in the Budget speech of 2021, aimed at unlocking the value of non-core assets, especially immovable property which is unused or underused; accordingly, the National Land Monetization Corporation was set up in June 2002 to operationalize this initiative. It remains to be seen if this extremely important and laudable important initiative will go forward expeditiously as a part of the overall reform process.

Tax reforms are also very crucial; estate duty/inheritance tax does not seem to be on the horizon, but it is unclear whether there will be some capital gains tweaking, particularly given the huge values and capital market buoyancy in the last couple of years. This could impact the market disproportionately and the Government presumably realizes that, but whether the new dispensation at the centre will lead to some changes is something which we will get a sense of in the run to the Budget (or in the Budget itself). On the GST front, rationalization of rates is a key area, as also, certain reforms are needed for sectors like insurance, aviation and shipping. On the rate front, the GoM is expected to consider the possibility of rationalization from the current 4 to 3 slabs, but this could lead to additional tax on essential items, with consequent impact on lower income groups; all in all, a tightrope scenario in a coalition scenario.

FDI is now quite liberal and recent amendments in technologically sensitive sectors; for example, up to 74% is now permitted under the automatic route for satellite manufacturing and operations, and up to 495 for launch vehicles and related systems. Overall, a lot has already happened and there is relatively limited headroom for making further liberalization, there will nevertheless be areas of further FDI reform and even given that the Government and its coalition partners seem to be very futuristic-oriented, one wonders whether there could be need for a consultative process will slow down FDI reform. On the other hand, Portfolio investments, whilst quite liberal, have been to some extent hamstrung by too many operational issues (and indeed, also by expensive market valuations), but whether the former will be addressed, is something one has to see.

Clearly, the Government does not have the sweeping mandate that it did in the last 2 terms, but it does seem to have a reasonably stable mandate. It is good to recall that there have been great instances of coalition Governments in India undertaking excellent reforms; the Narasimha Rao Government brought about major reforms, such as abolishing the license raj, and did a major reset of the FDI regime. The Vajpayee Government (1999-2004) accelerated the disinvestment process in India, by upgrading the Department of Disinvestments into a full-fledged Ministry (later metamorphosed into the current DIPAM). However, conflicting views, pulls and pushes and personal aspirations of coalition partners are a reality that one cannot ignore and it is in this context, that the better view of the reform process seems to be to view this with cautious optimism rather than irrational exuberance.


Ketan Dalal is Managing Director of Consulting Firm Katalyst Advisors.