More Indian Economic Reforms

British High Commission New Delhi

December 2012

Summary

The Indian Cabinet took multiple steps on 13 December, to address the investment slowdown in the country. While most of the measures taken were executive in nature, the land acquisition bill needs parliamentary approval. The activism that the government has shown in the past few months indicates that it is aware of the urgency of correcting the growth slowdown. As always, implementation will be key.

Detail

The last few months have been eventful for India’s economic policy climate. After announcing a slew of reforms in September/October; it recently won a hard fought vote in the Parliament approving its Cabinet decision to allow 51% FDI in multi brand retail.

In its latest meeting, the Cabinet set up a central committee to review all infrastructure projects over Rs 10 billion (£ 115 million), which will be chaired by the Prime Minister. All related ministries will now be given timelines to arrive at their decisions. In addition, the government has simplified procedures to award road projects. These steps are important since one of the major reasons behind the slump in India’s growth has been the fall in public investment: the value of projects shelved had reached a record high of over £ 9 billion in Q2 2012-13.

The Cabinet approved the Land Acquisition Bill; finally ushering in some policy clarity in one of the most controversial aspects of India’s industrial and infrastructural expansion. The existing bill on land acquisition dates back to colonial days; and most of the negotiations that would take place would be through mutual negotiations between the land owners, corporates and the government. However this has resulted in many disputes; at times escalating into law and order incidents which affected locals across the country.

The current draft proposes that it is mandatory to take the consent of at least 70% of the land owners for PPP projects and 80% for private projects. All the displaced landowners would additionally have to be rehabilitated before the project is started, and all disputes resolved within one year. 40% of the land will be reserved for project afflicted families for a price equal to the cost of acquisition. These norms would be applied as a bare minimum for projects across the country, over and above which individual states may have the option of adding measures to help the land owners. The bill may come up for discussion in the current session of the Parliament.

There are reports that the major opposition party, BJP may support the bill since most of their concerns have been addressed. While the policy clarity by the government has been welcomed by many, industry is worried about the increased cost of acquisition; resettlement and rehabilitation; as well as the costs related to getting 80% of the landowners’ permission. A noted industrialist remarked in a recent conference that the policy threatens to increase the cost of acquiring land by 6 -7 times. A local industry body had estimated that the diluted version of the bill that was being proposed earlier, could itself hike costs by around 3.5 times. A more stringent one now would mean more pain for industry. The silver lining is that there will be more policy certainty in this area.

Following the lower than expected proceeds from the re-auction of the 2G telecom spectrum in November, the Cabinet cut the reserve price of the unsold spectrum by 30%.  The government had previously been hoping for high auction proceeds to bridge the widening fiscal deficit; one of the major concern areas voiced by rating agencies.

Despite the policy reforms, Standard and Poor’s latest verdict is that India faces a one in three chance of a credit rating downgrade in the next 24 months. Moody’s however has expressed more optimism with the reform trajectory.   

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.

Countries: India
Topics: Finance
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