India’s reform momentum will define its economic future

The social, economic, and emotional blow of the COVID catastrophe is here to stay. The factors that will determine a country’s progress or failure in recovering economically from the pandemic will be its ability to make informed policy choices needed for equitable, inclusive, and sustainable growth.

India, a nation already engaged in radical reform programs since 2014, must now strive to continue on a path made more difficult by the added challenges of the virus.

India’s relationship with economic reforms has been a complicated one. ‘Change’ is largely viewed with caution, restraint, and resistance. The fragile politics of reforms dictated by its large diverse democracy and its federal polity has often obstructed radical reforms, impacting the pace of change and political conviction to implement it. India is an aggregation of 28 different State economies, each with varying strengths, weaknesses, and priorities. Often, the slow pace of reforms in land access, labour markets, regulations that are in the domain of State governments has left foreign businesses frustrated when engaging with the India market.

The powerful entrepreneurial dynamic of the ‘competitive cooperative federalism’ model introduced by the PM Modi led BJP government is aimed towards addressing some of these barriers of doing business in States which make the day-to-day life of a foreign business in India easy or difficult, and achieving common national goals.

It entails investing political capital in building consensus among States on the reform agenda and enabling States to compete to improve their business environments and attract investments. The concept is based on the principle that a State which implements successful reforms, encourages ease of doing business, invests in its social and physical infrastructure will then have greater entitlement to Federal allocation of funds, new projects and crucially will attract FDI opportunities into the State.

The government is aware that the speed and scale of India’s domestic reforms will play an integral role in determining its heft and place in the dynamic global economic and strategic space. Since taking power in 2014 the Modi government has used its strong political mandate to build the nation’s reform agenda, followed by delivery of systemic reforms. The disruptive nature of such radical but necessary reforms deterred India’s predecessor governments from enacting them in the past. 

Its focus on labour, farm, mining, financial sector, FDI reforms to name a few, are showing positive impacts. India has risen substantially in the World Bank’s Ease of Doing Business rankings since 2014, from 142^nd in 2014 to 63^rd today.  India saw the highest ever annual total FDI inflow of US$ 81.72 billion in the 2020-21 financial year. Likewise, the growing number of foreign firms – with over 2,000 US companies, over 1,600 German companies and more than 600 Indo-German joint ventures, over 1,300 Japanese firms, and over 600 UK firms - operating in India currently indicates the reforms are working.

These reforms present an opportunity for Australian businesses to deepen their economic engagement with India, strengthen Australia’s economic resilience by diversifying risks and expanding into new export markets. Australia’s India Economic Strategy to 2035 (IES 2035) and India’s Australia Economic Strategy provide a thorough roadmap for bilateral economic engagement.

IES 2035 recognises that ‘There is no market over the next 20 years, which offers more growth opportunities for Australian business than India.’ Its focus is to grow outbound investment from Australia into India by enhancing corporate Australia’s understanding of India – that is, ‘how to invest in India, where to invest, sectoral reforms and business and operating models to execute outbound investments effectively.’

The scale of the Australia India economic engagement would depend on several key factors. First the scope and timely execution of India’s sectoral reforms across infrastructure, agriculture, healthcare, education, resources, and financial sectors, where Australia has competitive advantages.

Second, the extent to which India opens up to global trade, acknowledging in light of RCEP withdrawal that this will likely be selective, will determine the degree to which it can attract investments, drive exports, make domestic industries competitive and incentivise other countries to manufacture in India.

Third, India’s geopolitical and strategic repositioning in the Indo-Pacific region through QUAD and the Supply Chain Resilience Initiative (SCRI) reinforces the fact that economic and strategic implications are linked, and here Australia is well-placed. Thus, Corporate Australia’s historical skepticism concerning Indian market opportunities should be weighed against geopolitical trends in favour of engagement, as well as taking cue from Japan’s long-standing business relationship with India.

Fourth, a renewed focus on Australia India Comprehensive Economic Cooperation Agreement (CECA) could open new avenues for trade and investment, reduce and rationalise tariffs and make trading easier and more predictable. However, Australia will need to recognise that the bilateral economic relationship will always be struggling if its export endeavor is not backed by FDI into India. In 2018, only about 0.6 per cent of Australian outbound investment was allocated to India, less than that allocated to countries such as Luxembourg, the Netherlands, Bermuda, and Papua New Guinea.

Fifth, success in India will require greater creativity from Australian businesses and Governments than we have needed elsewhere in Asia. FTAs are a tightrope walk between ensuring economic gains and managing national interests in India. Australia must explore sectoral FTA’s that can add greater reliability and dependence between both countries, mobilise both the public and private enterprises to identify opportunities and address India’s inhibitions.

Sixth, Australia would need to engage closely with India’s changing development paradigm, a factor that’s least understood and is marred by antiquated understanding. The politics and economics of the relationship are interdependent, a realisation that’s often missed by the way India is understood and viewed in Australia.

Going forward, 2021 offers a reform reset to the Indian economy to embolden its economic future domestically and globally.

Natasha Jha Bhaskar is General Manager of Newland Global Group, a Sydney-based Australian corporate advisory firm specialising in the Australia-India space.

The views expressed here are the authors, and do not represent the views of the Institute for International Trade.

Photo by Julian Yu on Unsplash