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3 Years of Modi: How India has Changed

Three years after leading the Bharatiya Janata Party (BJP) to India’s first majority government in more than three decades, Prime Minister Narendra Modi has turned India into the brightest shining star in the global economy.

He has exceeded the expectations of those who placed their trust in his leadership, as well as won the confidence of the Indian population and foreign investors at large.

Today, optimism about India’s future is at an all-time high; the country’s stock markets are soaring ; foreign investments have reached record high levels; the rupee is one of the strongest emerging market currencies; exports have picked up appreciably; and the economy has emerged as the fastest growing in the world.

Incidentally, when Modi came to power, growth was slipping, the currency was weakening, inflation was more than twice it is today and India was experiencing high fiscal and current account deficits. India was then ranked as one of the “fragile five” economies along with Brazil, Indonesia, Turkey and South Africa, causing foreign investors to take flight. 

But thanks to targeted, game changing reforms implemented by Modi, the Indian economy took off under his tenure and is now firing on all cylinders. 

At a policy level, diligently targeted consolidation measures have led to a significant decline in both the current and fiscal deficits; and inflation is currently less than half it was three years ago.

Modi’s comprehensive reform program encompassed far-reaching initiatives to remove the barriers to growth, support massive infrastructural development, improve the legal, tax and regulatory systems, promote greater mobility of capital and encourage foreign and private investments.

He implemented the Make in India initiative to promote local manufacturing; established Digital India to reform government systems, empower citizens, and facilitate greater inclusion in the financial sector; launched Skill India to harness the country’s demographic dividend; and set up the National Institution for Transforming India.

He has also taken steps to improve the primary education and health systems; increase productivity in agriculture; promote rural electrification; and establish a well-designed welfare and subsidy mechanism to uplift the standards of the poor. Corruption is also on the decline and government operations are becoming more efficient with the removal of archaic practices and procedures.

The government has also made progress in a range of areas, among them promoting massive infrastructure development; fueling the development of green energy; relaxing foreign investment limits; reforming the Land Acquisition Bill and mining laws; implementing the direct transfer of subsidies; lowering corporate taxes and introducing the Goods and Services Tax (GST).

India’s 2017-18 fiscal year budget allocated over US$60 billion to a variety of infrastructural projects, including roads, railways, waterways, power generation, and civil aviation. These projects will not only improve overall connectivity and movement within India, but will also create jobs across multiple sectors, facilitate easier flow of goods and services, and act as the springboard for greater economic activity.

Set for implementation on July 1, the Goods and Services Tax (GST) will replace 12 individual state taxes with a single federal tax. Over the long-term it will simplify the tax regime and make it easier to conduct cross-border business. According to the IMF, the upcoming implementation of the goods and services tax will help raise India’s medium-term growth to above 8 percent, as it will enhance the efficiency of production and movement of goods and services across Indian states.[1]

In the meanwhile, Modi’s digital revolution is aimed at increasing efficiency and connectivity among the Indian population, contributing to an increase in GDP growth. Currently 1.1 billion Indians have digital identities (ID)[2] which can facilitate digital payments, thereby transforming India from a mostly cash economy to a digital economy. India has also added over 250 million internet users since 2014[3] ; certain train stations are now providing free WiFi facilities through public-private partnerships; and Digital India aims to connect 250,000 local self-government bodies across Indian villages through broadband penetration.

In a surprising move last year, Modi demonetized large currency bills to curtail the underground economy. This move is now beginning to have a positive impact on the real economy. According to the IMF, India’s demonetization initiative resulting from the withdrawal of high denomination banknotes presents an opportunity to increase the size of the formal economy and broaden financial intermediation in the longer term. It can also support a widening of the tax base, help reduce the fiscal deficit, enhance bank liquidity, and give a fillip to the government’s efforts to promote greater financial inclusion.[4]

Increased optimism over India has resulted in a flood of foreign private and institutional investments, estimated at over $45 billion[5] in the past year. In particular, large Canadian institutional investors have seized the opportunity to take advantage of the diversified range of opportunities in India. Among them are the Canada Pension Plan Investment Board, Brookfield Asset Management, the Ontario Teachers’ Pension Fund, and Caisse de depot et placement du Quebec.[6]

As Modi enters his fourth year in power, his reforms which have had a stranglehold on India, will continue to have a long-lasting positive impact, putting him in good stead for a second term in office.

 

[1] ibid

[2] Wall Street Journal, India’s Massive Aadhaar Biometric Identification Program, January 13, 2017

[3] Economic Times,  India added 268.9 mn new Internet users since 2014: Adobe, March 6, 2017

[4] IMF

[5] Mint, FDI inflows into India jump 18% to a record $46.4 bn in 2016 despite global fall, February 18, 2017

[6] Economic Times, From airports to e-commerce, Canadian institutional money pouring into India like never before, February 17, 2017

 

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Disclaimer

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.