Trade, Investment, and Capital Markets

Introduction

Following Modi’s landslide victory last year, India’s potential for economic expansion seemed closer to realization. However, India’s history of corruption, excessive government intervention, and limited liquidity have prevented the growth of functioning capital markets and stable investment returns. Sturdy capital markets are required to achieve high rates of development and advancement in India. 

Background

During Hudson’s conferences in both March and August 2014, experts offered a number of solutions to increase trade, foreign investment, and the growth of capital markets in India. Nagesh Kumar emphasized the need to facilitate entrepreneurship and innovation in order to revive manufacturing. Chaitanya Pande predicted that if India can organize its savings into “productive channels” the next ten years will be marked by massive opportunity for Indian capital markets. In order to achieve this, Pande argues that regulatory and institutional frameworks, as well as intermediation of retail savings, must be reformed. He also claims that India will require $500 billion in the next five years to fund its infrastructure needs.

Modi Administration

Modi has made efforts to increase government transparency in order to fuel foreign investment and domestic innovation. He has implemented numerous investor-friendly and open-door trade policies in the areas of capital markets, infrastructure, and foreign investment to encourage modernism and reformism in the Indian economy.

Modi has also planned to spend $15.7 billion on infrastructure projects in 2015. He proposed an infrastructure company, the National Investment and Infrastructure Corp to attract private investors from around the world. In his first year in office, Modi decreased capital requirements for private sector airport developers, resolved to contribute up to 40% of public-private highway development, and agreed to allow companies to own private power plants to facilitate loan processing. 

India & WTO

However, in a disappointing setback in foreign trade relations, India refused to meet the World Trade Organization’s deadline on the Trade Facilitation Agreement (TFA). The deal aimed to streamline international trade procedures, potentially resulting in the addition of $1 trillion into the global economy. India expressed concern that the TFA would “undermine” the country’s budget for specific food supplies needed for its large impoverished population.

At the Hudson-Takshashila joint conference in August, Michael Owen Moore argued that it is vital for India to resolve this issue and remain in the WTO as a major player. Regardless of the results of international negotiations, Moore asserted that far reaching economic reforms will encourage trade and investment into the country.

The U.S. and India were able to reach a mutually agreeable solution after a bilateral summit in September 2014. Assurances were made that India’s food security programs would be held intact “indefinitely until a permanent solution regarding this issue has been agreed and adopted."

Goods & Services Tax

In December 2014 Modi proposed the Goods and Services Tax to comprehensively tax the production, sales, and consumption of merchandise and services nationally. Its purpose is to consolidate state economies and foster growth. Narayan Ramachandran argued that the GST creates profitable value-added taxes on certain products with the exception of alcohol and petroleum, and therefore should be implemented. Notable economist Mihir Sharma, however, claimed that the GST “could kill demand, growth, and recovery.”

Trade Deficit

The Modi government has also addressed India’s outstanding trade deficit. Figures for India’s latest fiscal year (ending in March) showed that India’s merchandise exports stood at $310.5 billion with imports at $447.6 billion. Unfortunately, this meant a wider trade deficit ($137 billion for 2014-2015) than the previous fiscal year ($135.8 billion). 

Data Source: World Bank

To balance the deficit, the Ministry of Commerce unveiled its new foreign trade policy in April 2015, announcing $900 billion in export targets for 2015-2020. This will be achieved by introducing new incentive schemes for goods and services. Commerce minister Nirmala Sitharaman stated that the plan coincides with Modi’s recently announced strategies of “Make in India,” “Digital India,” and “Skill India.” The new foreign trade policy intends to diversify India’s service and product exports in engineering, pharmaceuticals, textiles, and yoga. (Graph sources: World Bank)

Foreign Investment

2015 also marked a number of noteworthy international visits for PM Modi, in which he discussed investment, trade opportunities, and agreements with prominent world players. During his April visit to Canada, Modi discussed the role of civil nuclear technology and energy in increasing bilateral trade. During his tour of France and Germany in April 2015, Modi encouraged non-resident Indians living in Berlin to promote India as a manufacturing center in line with his “Make In India” initiative.  He secured a joint agreement with France to expedite the development of the Jaitapur nuclear plant. In addition, India and France signed twenty pacts for research in civil nuclear energy, urban development, and railways. France also pledged €2 billion towards sustainable development and agreed to co-finance the research and plans for a high speed railway system in India. On Modi’s trip to Bangladesh in June, Modi announced his desire for connectivity between all of India’s neighbors through various economic development plans. These plans include a coastal shipping agreement between India and Bangladesh, promoting Indian investments and increasing the power supply to Bangladesh, and cultivating joint regional development with Bhutan and Nepal.

On July 16, Finance Minister Arun Jaitley announced new measures to simplify foreign investment rules. Various types of foreign investments will be grouped together to form a single composite cap in several industries including tea, mining, and retail. Banks in India reacted positively to the news, and expect to raise up to $1 billion in capital as a result. Other industries like defense and insurance have had their FDI cap increased to 49%, before having to undergo extensive government regulations.

Challenges and Opportunities

The changes that have been implemented thus far have moved India in a favorable direction towards reaching its economic potential. Despite its progress, however, India is faced with the challenge of overhauling its foreign trade policies and its infrastructure. Restoration of investor confidence is also required in order to facilitate greater influx of foreign direct investments.