Narendra Modi: re-elected on promises of economic reform and an ‘open’ India

Merriden Varrall, Director, Geopolitics and Tax

Last week, incumbent Prime Minister Narendra Modi and his ruling Bharatiya party repeated and perhaps even succeeded their extraordinary electoral victory of 2014, making Modi the first Indian leader in nearly fifty years to win two consecutive single-party majorities. He won again on promises of housing for all by 2022, to double farmers’ incomes, and to spend US$1.44 trillion to build roads, railways and other infrastructure to boost manufacturing and exports.

With this mandate, there should be nothing stopping Modi now from continuing his agenda of economic reform and opening India to foreign direct investment. His major challenges will be to take action on the unemployment rate, which is at its highest level since the 1970s; land reform to allow the government to buy private land to build infrastructure; or the crisis facing farmers because of the low prices their produce is fetching. Tax reform, the availability of money, and development goals also still need to be addressed.

This election was a judgement on whether the Indian people believe Modi can deliver on his promises – and evidently hundreds of millions feel he is the man for the job.

The political climate

National security featured in the election following February’s terrorist attack in Pulwama (claimed by a Pakistan-based group) and the response from the Modi Government – a retaliatory strike in Pakistani territory. Mr Modi has threatened the use of nuclear warheads in response to any further terrorist attacks, which has played well among certain constituents. Exit polls revealed that hundreds of millions of Indians want a ‘strong’ leader to make them proud of their country.

Modi’s promises

Despite high growth since his first election in 2014, widespread unemployment continues, particular among the youth, and farmers are under economic stress. India’s government placed tariffs on some agricultural imports from Australia in 2017, for example, in response to the low prices farmers were receiving for crops, but unrest in rural areas remains.

In the area of foreign direct investment (FDI), Modi has a good record – India has received USD 239 billion of FDI in the last five years, particularly from Japan, South Korea and Singapore, largely due to the Modi government reducing regulation.

Prior to the election, Mr Modi announced a 750 billion rupee (AUD$15.5 billion) agricultural income support package, along with interest rate subsidies for farmers, and a rural employment schem

The Government has also promised the tax-free threshold would be lifted to 500,000 rupee (AUD$10,000), while having recently reduced the goods and services tax rates for small to medium businesses on some products and services.

In its February interim budget, the Government widened its fiscal deficit target to 3.4 percent of gross domestic product (GDP), with the intention to borrow more money.

A policy to reduce company tax rates from 30 percent to 25 percent, announced in 2015, was legislated for companies with a turnover up to AUD$50 million but not for larger firms. A focus on increasing tax revenue and assistance for small to medium-sized businesses has meant further cuts for large firms are unlikely.

Who didn’t win?

The election was closely contested by the opposition party, Indian National Congress. Leading the Congress Party, Rahul Gandhi – a descendent of three former Indian prime ministers – campaigned on apparent Modi government policy promise failures. Opposition parties highlighted economic consequences of the Government’s demonetisation policy, which they say placed pressure on small business and destabilised a cash economy.

Mr Ghandi also pledged to introduce a pension for India’s poorest families, reform the GST, increase spending on education and reserve 33 percent of government jobs for women.

Also in play was an influential grouping of regional parties, Mahagathbandhan, or ‘Grand Alliance’. Formed in the run-up to this general election, the loose alliance includes anyone opposed to the BJP. The regional alliance held considerable appeal for many low-income voters in India’s most populous states who feel that Modi’s policies have not worked for them. Traders, too, who traditionally voted BJP, are dissatisfied with the 2017 GST and also looked to the Alliance. While the alliance is strong in its anti-BJP opposition, it was not clear what its alternative policies were.

Results and implications

Around the world, confidence in India has been growing. The United Nations Conference on Trade and Development describes India as one of the most favoured global investment destinations, a long way from Morgan Stanley’s 2013 label as one of the ‘fragile five’. This matters for Australia, given India is its fifth largest trading partner, with exports valued at $19 billion as of 2016-2017.

With this resounding victory, Modi has clearly got the majority of Indian people’s support for his agenda. While this suggests positive reform and progress ahead for India, there do remain some questions about whether some of the social tensions that we saw during the campaign will be easily quieted.

An earlier version of this article was published as part of our elections series on KPMG Tax Now, which endeavours to explain how geopolitical trends are being played out and affecting tax policies around the world.

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