John Redwood: India’s reforms are steps in the right direction

India is one of the world’s giants with 1.3 billion people. It promises much, and has in recent years experienced rapid growth. Under its latest Prime Minister, Narendra Modi, there is a new impatience to banish poverty, to modernise and industrialise on a huge scale. The world’s largest democracy, it has found reform difficult to achieve, with plenty of resistance to change.

Mr Modi has been popular with many voters and with the international business community since first becoming Prime Minister. He has talked up his view that India needs to alter the way it does things to accelerate its growth rate. In his early period in office he found it difficult to get any reforms through Parliament and the divergent states. He concentrated on talking of progress to come, and on engaging with the wider international Indian community on how business could grow and develop.

More recently he has become a bold reformer. He took away large denomination bank notes in a move designed to persuade many more people and businesses to have bank accounts and to use them for transactions. He wanted to curb tax shy activity, to modernise payments, and to help expand the banking sector by adding to their deposit base. It appears that he has achieved quite a switch from cash to bank account money as a result. His critics pointed to the temporary dip in the money supply and in transactions as small businesses adjusted to the new reality.

Now more people and companies trade using a bank account to settle their bills. This summer Modi unleashed the largest reform of all. India’s 29 states have previously imposed a variety of taxes on transactions, with a different mix and different rates in each case. The Indian state has also imposed a range of taxes on transactions. Cross border trade between states in the Indian Union has been slowed and made more costly by the various tax impositions that have to be accounted for as goods move. Mr Modi has implemented a comprehensive tax reform from 1 July onwards. It imposed a Goods and Services Tax (GST) country wide, with some of the money credited to the individual states and some to the centre.

The new tax, which replaces Excise duties, Service Tax, Entry Tax, luxury taxes, VAT, sales taxes, the Entertainment Tax, lottery taxes and other turnover related taxes. There will be four rates, of 5%, 12%, 18% and 28%. The high rate had to be offered to deal with states who favour luxury taxes, and applies to the more expensive items. If all goes well with this introduction, India should see faster growth in trans Indian trade, with savings on paperwork and complexity that currently slows and impedes transactions.

Mr Modi has other reforms in mind. He is promoting modern cities with better communications. He is seeking land reform to speed infrastructure development. Trying to assemble land for transport or major developments is a slow and complex process. He has found it difficult to reform labour relations as he would like. He wants a more flexible workforce, believing that could then be better paid. The unions have different opinions about giving up the rules they currently live under.

The Goods and Services Tax reform has now been enacted. It may have teething problems, as it a big and complex change. Overall it should assist faster growth in India, and will probably be well received by international investors and markets. Indian shares are quite expensive by world market standards, but they represent companies in a fast-growing economy with great potential. As more and more Indian citizens get better paid jobs and aspire to the middle class lifestyle, so India generates a vaster market for the goods and services they can afford. Mr Modi’s liberalisations add to the potential. They remind us India is still a low income country with plenty of things to change that could make it richer. As it grows, so should its quoted companies.

John Redwood is chief global strategist