India’s new leader Modi steps up economic reform

Narendra Modi is overhauling Indias archaic labour laws. Picture: Reuters

Over the past week, prime minister Narendra Modi has unveiled an overhaul of India’s archaic labour laws, freed diesel prices from state control and signed an executive order promising to open India’s coal industry to private companies.

He also appointed Arvind Subramanian, a Washington, DC-based economist, as the country’s top economic adviser.

Mr Modi, who led his Bharatiya Janata Party (BJP) to a landslide election win in May on promises that he would re-energise India’s stumbling economy, faced a flurry of criticism after his July budget failed to provide new direction.

But that appears to be changing, reigniting optimism that India can lift its economic game.

Although India’s economic growth was not far behind China’s in the past decade, it has slumped in recent years, hurt by policy gridlock, weak investment, high inflation and epic corruption. Lack of progress over decades is highlighted by slow poverty reduction. In 1978, some 99 per cent of the population lived on less than $5 (£3)a day, according to World Bank figures. By 2011, that poverty rate was barely changed at 95 percent. Experts say that the BJP’s recent successes in two state elections have given Mr Modi greater political power to implement his agenda.

It has increased his party’s representation in the upper house, which can delay legislation, and also puts two more states closer in step with the federal government.

The government now has the freedom “to take stronger, bolder steps,” said DK Joshi, chief economist at the financial research firm Crisil. Mr Modi, who has promised to make India a global centre for cheap manufacturing, announced a major overhaul of labour laws last week, hoping to attract investors.

India’s onerous labour laws, many written when the country was a British colony, require reams of paperwork and strictly regulate all hiring and firing of employees, often deterring companies from bringing in new staff. That, Mr Modi said in speech in New Delhi, needs to change.

“Ease of business is the first and foremost requirement” to increase India’s manufacturing strength, he said.

Creating more jobs is a high priority in India, where some 13 million young people join the workforce each year.

Mr Modi’s announcements came as the economy showed some signs of revival, with inflation plummeting to five-year lows because of falling global oil prices.

Taking advantage of that dip in crude prices, the Indian cabinet freed diesel prices from government control over the weekend, targeting one of India’s costliest subsidies.

The subsidy, along with high international oil prices and a dependency on petroleum-based fuels, has caused India’s trade deficit to balloon in recent years, reaching £8.9 billion in September.

Mr Joshi said that highly subsidised diesel prices had encouraged consumers to guzzle the fuel, adding greatly to the government’s subsidy bill.

He added: “It’ll send a signal to consumers to conserve fuel” while easing the government’s subsidy burden.

Mr Subramanian’s appointment was also welcomed by industry.

The senior fellow at the Peterson Institute for International Economics in Washington DC has worked at the International Monetary Fund and taught at Harvard.

The economist is seen by many in business as well equipped to mastermind India’s economic makeover.

Meanwhile, this week’s executive order that will eventually allow any Indian company to mine and sell coal, opens up an industry nationalised more than four decades ago.

It also sends a strong signal about a shift away from highly restrictive industrial regulations.