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The government has implemented far reaching reforms, allowing the private sector to enter hitherto closed sectors such as atomic energy, space and coal mining. It has also liberalised the rules governing the minerals sector and increased the FDI limit in defence manufacturing, among dozens of other measures to liberalise the economy.
India’s Railways and Commerce & Industry Minister Piyush Goyal recently tweeted a quote by Prime Minister Narendra Modi saying: “We in India implemented huge reforms across sectors, be it mining, space, banking, atomic energy and more. This goes on to show that India as a nation is adaptable and agile, even in the middle of the pandemic: PM @NarendraModi Ji.”
The Modi government has implemented far-reaching reforms in a number of sectors in its second term, including but not limited to, the ones mentioned in the Goyal’s tweet. The messaging, however, has got drowned out by the blanket coverage of the Covid-19 pandemic; as a result, the government doesn’t get as much credit for its reformist credentials as is due.
The decision to slash India’s relatively high corporate tax rates to 25.17 per cent, inclusive of cess and surcharge, was a bold one. This rate is applicable to all companies that do not avail of any exemptions. Further, to encourage companies to Make in India, Finance Minister Nirmala Sitharaman had allowed companies that set up factories after October 1, 2019, to pay corporate taxes of 17.01 per cent, including cess and surcharge. These companies have to begin production before March 31, 2023.
At one stroke, the Modi government made India’s corporate tax rate competitive vis-à-vis peer nations in the ASEAN and South Asia as well as China.
The decision to slash India’s relatively high corporate tax rates to 25.17 per cent, inclusive of cess and surcharge, was a bold one. At one stroke, the Modi government made India’s corporate tax rate competitive vis-à-vis the ASEAN bloc and South Asia as well as China.
In arguably the biggest boost to Modi’s Make in India flagship programme, the government unveiled a production-linked incentive (PLI) scheme. This initiative, which seeks to attract investments from companies looking to diversify their supply chains away from their current over-dependence on China, targets 13 sectors – mobile manufacturing and specified electronic components, drug intermediaries and active pharmaceutical ingredients, pharmaceuticals drugs, medical devices, automobiles and auto components, specialty steel, telecom and networking gear, electronic/technology products, white goods (ACs and LEDs), food products, textile products: MMF segment and technical textiles, solar PV modules, and advanced chemistry cell (ACC) batteries.
Sitharaman has allocated $27 billion (at current exchange rates) for the PLI scheme, which will boost domestic manufacturing under the government’s Atmanirbhar Bharat initiative. It is expected to add $500 billion to domestic manufacturing output in five years, the Commerce Ministry has said.
The government has already announced incentives for nine sectors including electronics and technology products ($670 million), pharmaceuticals drugs ($2 billion), telecom & networking products ($1.65 billion), food products ($1.5 billion) and solar PV modules ($600 million), among others. The incentive schemes for four sectors, namely, automobiles & auto components, ACC batteries, textiles and specialty steel are still awaited.
The government has already received applications worth several billion dollars from leading global companies such as Apple (through its contract manufacturers Foxconn, Pegatron and Wistron), Samsung and dozens of other multinational and Indian companies are in the process of setting up factories under this scheme.
Then, as mentioned by the Prime Minister in Goyal’s tweet, the government has announced a slew of reforms in the space, atomic energy, mining, coal and other sectors. In broad brush terms, the most important decision is the one to end all public sector monopolies and allow the private sector entry into every segment of the economy, including space, coal mining, atomic energy and defence manufacturing, among others.
The government has also decided, in principle, to sell all public sector units except in 18 identified “strategic sectors” in which it will continue to own a maximum of four companies, alongside private companies operating there.
The government unveiled a PLI scheme to attract investments from companies looking to diversify their supply chains away from their current over-dependence on China in 13 sectors. It is expected to add $500 billion to domestic manufacturing output in five years.
India is among the world’s foremost space powers but till recently, the private sector had a limited role to play in it, mainly as vendors to the Indian Space Research Organisation (ISRO). To build on the successes of ISRO and to expand the scope of the space sector, in terms of both technology and job creation, the government has opened it up to the private sector.
This will allow private sector players such as the Tata Group, the Godrej Group, Larsen & Toubro as well as India’s burgeoning start-up and MSME sectors to emerge as independent players in fields such as satellite launches, space exploration, remote sensing, meteorology, communications, television and broadband services, space exploration, navigation and defence and security-related activities.
It must be borne in mind that despite ISRO’s successes, India commands a mere 2 per cent market share in the $350 billion-a-year market in the global space sector, mostly at the lower end of the spectrum. The entry of the private sector and India’s highly innovative start-ups into this sector will encourage innovation and enable the country to climb up the value chain in this technology- and capital-intensive industry and grab a larger global footprint.
Another major but largely unheralded reform measure unveiled by the Modi government is the decision to allow the private sector to enter the atomic energy sector, hitherto a monopoly of the public sector.
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This will facilitate the entry of private companies, including start-ups and MSMEs into segments that deal with the consumer application of nuclear technology such as medical scanning equipment, cancer treatment and irradiation technology for the agricultural sector.
This is expected to significantly reduce India’s dependence on costly imported equipment and also open up export opportunities and create jobs in the country.
The most radical step taken by the Modi government in the mining sector is to abolish the public sector monopoly over commercial coal mining. This will allow Indian and foreign mining firms to ramp up output and sell coal in the domestic and export market.
The reforms in the mining and minerals sector are another major achievement of the Modi government. The easy entry of private and foreign companies will bring in much needed investments and new technologies into this sector, which is notorious for corruption, red tape and inefficiency.
The reforms envisage a seamless mining and exploration regime, a radical departure from the current regime where the two are delinked. The new norms provide for automatically granting mining licenses to companies that prospect for and find any minerals, unlike in the past, when they had to compete with others for the right to mine the minerals they had discovered.
This will loosen the stranglehold of politically connected companies that have traditionally had a stranglehold on such mining licenses and encourage multinationals such as Rio Tinto, BHP Billiton and others to invest in India, bringing with them the latest technologies, management practices and a new governance paradigm.
The most radical step taken by the Modi government in the mining sector is to abolish the public sector monopoly over commercial coal mining. This will allow Indian mining firms like Essel Mining, Sesa Goa, JSW Energy, Adani and global giants like Rio Tinto, Vedanta, BHP Billiton and Glencore to ramp up output, produce and sell coal in the open market, both in the domestic and export market.
The inefficiency of the public sector has resulted in India, which has the world’s fourth-largest coal resources, to import coal worth billions of dollars every year.
The government has also allowed up to 74 per cent FDI in the defence manufacturing sector under the automatic route. Foreign defence manufacturing companies are allowed to hold 100 per cent in their Indian subsidiaries on a case-by-case basis.
This is expected to help India, which is the world’s second largest arms importer, to set up a competitive defence industrial complex in the country.
These are some of the major reforms measures undertaken by the Modi government in its second term and are expected to help India’s Covid-hit economy get back to the high growth trajectory as factories, mines and R&D centres set up under various schemes go on stream and start production.