Reform Comes Slowly to India's Business Environment

6 MINS READJul 21, 2015 | 09:15 GMT
A puddle reflects the Indian Parliament following heavy rains in New Delhi.

Downpours across central India have eased fears of drought spurred by weak rains earlier in July. But India's ruling Bharatiya Janata Party (BJP) is unlikely to see similar relief during the parliament's summer monsoon session slated to begin July 21. Several scandals surrounding an entrance examination cheating ring that involved senior party members is dominating the headlines, putting Indian Prime Minister Narendra Modi's government on the defensive. With the summer parliamentary session approaching, opposition parties led by the Indian National Congress Party have forced the BJP to focus on defending its politicians rather than promoting its proposed landmark bills addressing labor reform, foreign investment caps and contentious revisions to India's much-debated Land Acquisition Bill.

In the wake of India's disappointing economic performance in June, the monsoon legislative session seems likely to result in political impasse rather than reform. Still, the BJP's attempts to negotiate with the country's unions and opposition parties indicate that Modi and his party have moved beyond trying to leverage an unreliable majority to implement change, instead accepting gradual reform rather than sweeping changes to India's business environment. 

Since taking office in May 2014, Modi has attempted to initiate a series of reforms focusing primarily on economic growth. At their heart, the reforms aim to boost India's manufacturing output to generate higher-paying jobs and to transform India's rural, agricultural society. One such reform is Modi's "Make in India" agenda, which seeks to address many of India's economic challenges by encouraging investment into India's manufacturing potential. Modi hopes to mobilize India's large population to transform the country's economy, taking cues from the country India is most commonly compared to: China. His government seeks to lessen the disparity seen between India and other emerging economies like China in urbanization rates, manufacturing as a percentage of the overall economy, average wages and strong economic growth.

The challenges to Modi's agenda are manifold. India's investment and taxation regulatory environment is difficult to navigate, often prohibitively so to would-be foreign investors. Infrastructure issues stymie the transportation of goods. Land acquisition is a politically charged social issue that complicates and often delays attempts to secure spaces for economic development, roads and railways, manufacturing zones and resource extraction. Opponents have stalled Modi's land reform by labeling it anti-farmer, generating staunch resistance to the bill among India's largely rural voters. 

Modi's Labor Reforms

Unable to tackle land reform, Modi is set to take on another long-contested aspect of India's socialist-tinged political legacy in the parliament's upcoming session: labor laws. Investors have cited India's convoluted labor laws as one of the biggest obstacles to setting up large-scale manufacturing in the country. Many laws mandate that any company employing more than 100 people must secure the government's approval to implement layoffs, a process that has seen government employees deny approval to avoid angering workers (and by extension, voters) or engage in the corrupt quid pro quo practices that have become a hallmark of India's business climate.

The proposed reforms would exempt companies with fewer than 300 employees from the need to seek government approval for layoffs, though the exempted companies would be obliged to offer higher severance packages to laid-off workers. The labor bill would also make it more difficult for workers to unionize, though the reforms also propose to expand minimum wage eligibility to all workers, raising the national minimum wage from 137 rupees per day to 160 rupees.

The current labor laws were originally intended to protect workers and their employment, but instead they have had the opposite effect. Studies show that more than 70 percent of Indian manufacturing companies employ fewer than 50 formal employees, and that less than 10 percent of workers in the manufacturing sector are considered formal employees. Temporary or informal employment has proliferated, dissuading investment into large-scale manufacturing and preventing Indian workers from finding stable, long-term employment in the sector.

The broader consequences of India's labor system have not been confined to the manufacturing sector, either. According to government estimates, the agricultural sector accounts for nearly 70 percent of India's economy, and the country's low urbanization rates compared with the rest of the BRICS member states have meant that India's housing sector — along with construction, steel and cement manufacturing, infrastructure development and automobile demand — have not seen the kind of growth and investment needed to move the country away from its agrarian roots. (The World Bank estimated India's 2014 urbanization rate to be 32 percent, compared with 54 percent in China, 74 percent in Russia, 85 percent in Brazil and 64 percent in South Africa.) Still, India's economy has seen growth overall, as well as a burgeoning middle class. Rising income and consumption has widened India's trade deficit steadily since the early 2000s, primarily benefiting Chinese exports.

The "Make in India" campaign touts a host of solutions to India's economic problems that include not only labor regulations but also land acquisition, foreign investment caps and the privatization of state-dominated heavy industries. However, political opposition has frozen the ruling party's reform efforts in the past, and the Indian parliament's summer session is unlikely to provide any new traction for Modi's proposals.

Modi Considers New Tactics 

Despite the opposition's entrenchment in the upper house of parliament, Modi must continue to advocate economic reforms to demonstrate his government's commitment to its pro-business stance. Defeat, or in this case capitulation, would signal to domestic and foreign investors alike that India, despite promises to the contrary, is not yet open for business, nor is the BJP the party to bring about economic growth. The BJP won India's 2014 general elections by a wide margin, and the ruling party tried to push its legislation through by force during Modi's first year in office. These efforts spurred a strong backlash from opposition parties, from voters through protests and threats of labor strikes and from within Modi's own party.

Ruling Parties in Indian States

Ruling Parties in Indian States

Now, suffering from political scandals and claims of corruption and hoping to avoid the widespread pushback that blocked land reforms bill in the parliament's previous session, Modi and the BJP seek to work with their opponents rather than exclude them from the decision-making process. National unions said they would launch a major strike Sept. 2 if the government pushed labor reforms through. In response, the BJP is trying to work with the labor unions and local political entities to reach a deal that will prevent nationwide strikes while getting the legislation approved. Similarly, Modi and his party's leaders are attempting to get elements of the land acquisition reform passed at the state (instead of the national) level.

The opposition and labor unions have shown some interest in negotiating with the government. However, the piecemeal process will only complicate India's already-complex regulatory environment, which will discourage ventures whose supply chains would cross the borders of India's 29 states and seven union territories. The jumble of competing local regulations and uneven economic development is exactly what Modi campaigned against — and what most frustrates potential investors in Indian manufacturing. Still, the process of reforming the country's business environment will ultimately move forward, though success will come more slowly and with greater difficulty than Modi's slogans and promises imply, likely extending beyond the end of the government's term in 2018.

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