Key pending reforms facing India's next government

NEW DELHI Thu Apr 24, 2014 1:30pm IST

Polling officers with electronic voting machines (EVM) along with Indian security personnel travel in a boat to reach polling stations ahead of the sixth phase of the general election in Assam April 23, 2014. REUTERS/Utpal Baruah

Polling officers with electronic voting machines (EVM) along with Indian security personnel travel in a boat to reach polling stations ahead of the sixth phase of the general election in Assam April 23, 2014.

Credit: Reuters/Utpal Baruah

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NEW DELHI (Reuters) - The biggest challenge for India's next government, due to take charge after election results in May, will be to pull the economy out of its deepest slump in decades.

Thursday was the sixth round of voting, which runs to May 12, with one recent opinion poll showing that the opposition Bharatiya Janata Party (BJP) and its allies may win an outright majority, ousting the Congress-led government.

Here are 10 economic reform challenges that will require urgent attention from the new government:

1) GOODS AND SERVICES TAX (GST):

India's most ambitious indirect tax reform would replace existing state and central levies with a uniform tax, boosting revenue collection while cutting business transaction costs.

GST, which could boost India's economy by up to two percentage points, has so far faced resistance from various states, including those governed by the Hindu nationalist BJP who fear loss of their fiscal powers.

While the Congress party's manifesto promises to enact the bill within a year, the BJP aims to address state concerns and implement GST in an "appropriate timeframe". The reforms need broad backing because they require a change in the constitution.

2) RESERVE BANK OF INDIA:

A Reserve Bank of India panel in January proposed key changes including targeting consumer price inflation and making a committee responsible for monetary policy, and not the RBI governor alone. This would require changes to the RBI Act.

Congress had objected to inflation targeting as it wants the central bank to also emphasis economic growth. Though the BJP top brass have not spoken on the issue, inflation targeting will be a tough sell for RBI Governor Raghuram Rajan.

3) PRIVATISATION:

A new government is likely to focus on selling its holdings in state-run firms that could raise much-needed revenues to trim India's ballooning fiscal deficit and boost economic growth.

The rising stock market has helped New Delhi raise more than $3 billion via stake sales in the fiscal year to March 31 - but that was only a third of the government's original target.

The government has announced plans to raise 569 billion rupees ($9.3 billion) through asset sales in 2014/15. This could help it achieve its lower fiscal deficit target of 4.1 percent of GDP. These estimates may be revised by the next government.

4) SUBSIDIES:

India's next government would need to examine how it subsidises basic commodities if it is to contain the fiscal deficit and avoid a ratings downgrade.

Subsidies cost an estimated 2.2 percent of India's GDP in 2013-14. Total outlays on food, fertilisers and fuel subsidies are expected to reach 2.5 trillion rupees ($40.95 billion) this fiscal year.

The Congress party states that it will back only necessary subsidies while the BJP seeks greater fiscal discipline without compromising on the availability of funds for development.

5) LABOUR:

Inflexible labour laws, which employers say tie their hands if they want to reduce the size of their workforce, need an overhaul if India is to create the tens of millions of new jobs it needs to become a low-cost manufacturing centre.

Companies are hiring more contract workers to circumvent these stringent laws, leading to pay disparities and a lack of job security for the unorganised workforce.

While both the BJP and the Congress have set out steps to reform India's labour sector, the challenge will be to set measures acceptable to employers, workers and trade unions.

6) DEFENCE:

More foreign investment in defence would help India reduce imports, modernise weapons systems and speed up deliveries of hardware it needs for operations and training.

India, the world's biggest arms importer, now allows 26 percent foreign ownership in defence, and proposals to exceed that limit are considered only for state-of-the-art technology.

The BJP has said it would allow some greater foreign investment in defence industries, while Congress prioritises the development of the state-owned sector.

7) INSURANCE:

Attempts to raise the cap on foreign investment in India's $45 billion insurance sector, to 49 percent from 26 percent, have met resistance from employees at state-controlled insurers and their political backers.

A BJP leader said last month the party had held talks with Congress to break the deadlock.

8) BANKING:

The next government will need to help state-run lenders battling rising bad loans caused by the slowing economy, rising interest rates and project delays.

Stressed loans in India - either bad and restructured - total $100 billion, or about 10 percent of all loans. Fitch Ratings expects that ratio to reach 14 percent by March 2015.

The interim budget in February set aside 112 billion Indian rupees ($1.83 billion) to help the sector meet key capital ratios, but analysts say more steps are needed.

9) COAL:

Reforming coal mining would help contain India's trade deficit and aid the stretched power sector. Despite its vast coal reserves, India has to import the fuel as mining is hobbled by corruption and legal battles.

The new government could lease coal blocks to private companies on a contract basis, which would ease legal problems and help boost production in the short-term.

10) POWER:

A BJP-led government may implement the so-called Gujarat model of distributing electricity that has been widely praised for delivering reliable 24-hour power supplies in the state.

Narendra Modi, Gujarat's chief minister and the BJP's candidate for prime minister, provided different power feeds to farmers, households, and companies instead of a uniform feed.

($1 = 61.0550 Indian Rupees)

(Compiled by Aditya Kalra and Suvashree Dey Choudhury; Editing by Douglas Busvine and Michael Perry)

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