Key pending reforms facing Modi's new government

NEW DELHI Fri May 16, 2014 1:45pm IST

A party worker walks past a cut-out of Hindu nationalist Narendra Modi, the prime ministerial candidate for India's main opposition Bharatiya Janata Party (BJP), inside the party's regional office in Mumbai May 14, 2014. REUTERS/Danish Siddiqui

A party worker walks past a cut-out of Hindu nationalist Narendra Modi, the prime ministerial candidate for India's main opposition Bharatiya Janata Party (BJP), inside the party's regional office in Mumbai May 14, 2014.

Credit: Reuters/Danish Siddiqui

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NEW DELHI (Reuters) - Opposition candidate Narendra Modi will be the next prime minister of India, with counting trends on Friday showing his Bharatiya Janata Party (BJP) headed for the country's most resounding election in 30 years.

Modi has promised to unblock stalled investments in power, road and rail projects to revive economic growth that has fallen to a decade low of below 5 percent.

Here are 10 economic reform challenges that would require urgent attention once Modi forms a new government:

1) GOODS AND SERVICES TAX (GST):

India's most ambitious indirect tax reform would replace existing state and federal 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 BJP who fear a loss of their fiscal powers.

The BJP aims to address state concerns and implement GST in an "appropriate timeframe". The Congress party would back the reform in opposition, a senior party member told Reuters earlier this month.

The reform needs broad backing because it requires 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.

The BJP top brass has not spoken widely on the issue, but it will likely be a tough sell for RBI Governor Raghuram Rajan. He has the backing of some global agencies like the International Monetary Fund.

Modi's government may also look to eventually separate the debt management function from the RBI, on the gounds that debt management sometimes conflicts with the central bank's monetary policy stance.

3) PRIVATISATION

The 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 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 outgoing government announced plans to raise 569 billion rupees ($9.62 billion) through asset sales in 2014/15. This could help achieve a lower fiscal deficit target of 4.1 percent of GDP. These estimates may be revised by the next government.

4) SUBSIDIES

Modi's government needs 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. The BJP in its manifesto said it will seek greater fiscal discipline without compromising on the availability of funds for development.

5) LABOUR

The BJP wants to reform labour laws to boost job-intensive manufacturing and create as many as 10 million jobs a year for young Indians entering the workforce.

Changing the law would be politically tricky, though, and Modi may seek to encourage competition between India's states to boost job creation.

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.

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 in March 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.

Rising bad loans threaten to choke the gradual recovery in Asia's third-largest economy, according to the OECD. The interim budget in February set aside 112 billion rupees ($1.89 billion) to help the sector meet key capital ratios, but analysts say more money is needed.

9) 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.

Modi provided different power feeds to farmers, households, and companies instead of a uniform feed in his home state.

10) GAS PRICING

In January India notified the new gas pricing formula that could double the prices of locally produced gas from April 1, but the poll regulator stopped the government from raising the prices until the elections are over.Reliance Industries (RELI.NS) and its partners BP (BP.L) and Niko Resources (NKO.TO) last week issued a notice of arbitration to the government seeking implementation of higher gas prices.

The BJP-led government may review the formula on the lines suggested by a senior party leader last year and announce the date of implementation of new prices.

($1 = 59.1450 rupees)

(Compiled by Aditya Kalra, Suvashree Dey Choudhury and Nidhi Verma; Editing by Douglas Busvine and Simon Cameron-Moore)

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