Narendra Modi’s “friendship” with US President Barack Obama doesn’t appear to be going in the direction that the Indian prime minister would like.
The American government has become the latest critic of the Modi government’s failure to deliver on its promises and raised doubts about the country’s estimates of its economic growth. The Indian government has been “slow to propose other economic reforms that would match its rhetoric, and many of the reforms it did propose have struggled to pass through parliament,” Washington noted in its Investment Climate Statements for 2016.
The Investment Climate Statements, prepared annually by US embassies and diplomatic missions, provide information on investment laws and practices in each region, specifically to aid American investors in their investment decisions.
Disappointments
Modi’s victory in 2014 was a turning point for investor sentiment in India. He had come to power with a complete majority, so most observers assumed his government would be able to implement reforms more smoothly. That hasn’t been the case. The Indian Parliament has failed to pass some key reforms, the US government said, citing examples of the land acquisition bill and the goods and services tax (GST) bill.
“This has resulted in many investors retreating slightly from their once forward-leaning support of the BJP-led government,” the report said.
In August 2015, opposition parties in the Indian parliament managed to stop a refurbished and contentious land acquisition bill that Modi and his government backed. This was a major setback for the ”Make in India” campaign as acquiring land for factories continues to be a complex and painful procedure in the country. Projects worth Rs53,000 crore ($9 billion) are stuck due to land acquisition problems in India, according to some estimates.
The government is still negotiating details about GST with opposition parties. GST aims to streamline India’s convoluted tax structure and is likely to provide an immediate boost to the country’s GDP.
“Overstated” growth
Given that several key reforms are yet to be implemented, the country’s claim as the fastest growing economy in the world may not be correct, the US government said. ”Ostensibly, India is one of the fastest growing countries in the world, but this depressed investor sentiment suggests the approximately 7.5% growth rate may be overstated,” the report said.
The US isn’t first to doubt India’s GDP growth data. Many economists—and even the country’s central bank—have in the past voiced concerns over the new method of calculation that instantly increased the country’s GDP growth from 4.7% to 6.9% for the 2013-14 fiscal year.
The on-ground situation in India also indicates that all isn’t well. For instance, the pace of manufacturing growth is slow, private investments are yet to pick up, job creation is tepid and exports need a boost.
Socio-economic challenges
The report also warned potential investors of India’s sluggish legal system and complex business environment.
“Although India prides itself on its rule of law, the country ranks 178 out of 189 in the World Bank’s Ease of Doing Business Report in the category of enforcing contracts,” it said. “Its courts have cases backlogged for years, and by some accounts more than 30 million cases could be pending at various levels of the judiciary.”
Each of India’s 29 states and seven union territories has unique tax structures, labour laws, education levels and quality of governance, which means “investors must be prepared to face varied political and economic conditions,” the report said.