Modi’s Reform Blitz

Good Morning. The prime minister's record 103 minute Independence Day speech from Delhi’s Red Fort on Friday morning was a mix of many things ranging from external securities to domestic issues, but a good part sounded like a Union Budget speech as well. 

The Prime Minister seems to be using this moment to catalyse a fresh generation of reforms. How much of a difference could it make on the ground?

THE TAKE

Modi Eyes 1991-Style Overhaul As Tariff Pressures Mount

Was this the 1991 moment? 

It was mostly not. 

But Prime Minister Narendra Modi’s reference to next-generation reform aimed at overhauling laws, rules and procedures around economic activity was definitely a step that India sorely needs and businesses at large would welcome.

In his Independence Day speech, the Prime Minister also said the government would cut goods and services tax (GST) rates and reduce the tax burden on the common man. 

I will come to that in a moment. 

Both government and industry have been struggling to come to terms with the US Government’s stance ever since the tariff drama started in April. While other countries have too have hit with import tariffs, India has evidently got special treatment, but not the good kind. 

India faces the unique distinction of facing almost the same 26% rates that were threatened on April 2 by US President Donald Trump in his now famous Rose Garden `Liberation Day’ speech, preposterous even then.

The new rates that kicked in the week before are at 25%, as opposed to the 15% they were expecting. But then the US slapped another 25% as a threat to make us stop buying crude oil from Russia.

On Thursday, US treasury secretary Scott Bessent went a step further and lashed out at the Europeans, saying they, too, should impose tariffs on India for buying crude oil and then selling some of the refined products to them. 

He then added that more tariffs could come India’s way, which would mean it would go up even further from the 50% which is 25% now and 25% from August 27, assuming, of course, a failure of negotiations.

The good news so far has been that India has firmly decided not to respond with its own tariffs. 

Fun fact: they are higher now on average than they were around 10 years ago. 

Big Push For Reforms

The policy consensus appears now  to be that we should use this opportunity as a sort of 1991 moment to push through our major pending reform programmes.

The Prime Minister rightly talked about next-generation reforms on Friday. Seen in the context of the tariff battle, there is visible urgency and perhaps the tailwinds to move faster than before.

The Prime Minister said rules, laws and policies must be re-drafted to suit the 21st century.  

He promised a significant reduction in compliance costs. Changes in logistics and systems would also give a major advantage in the field of exports. “These reforms will give courage to all those who wish to shape their future,” Modi added.

He also referred to the plethora of laws which criminalise the smallest of infractions, something we have discussed before.

GST Reality Check

Now comes the execution challenge.

All the cogs in the wheel must be oiled at once, explained Rahul Mehta, chief mentor of the Clothing Manufacturers Association of India (CMAI), which represents some 20,000 garment makers across the country.

“Doing just one thing like simplifying procedures and documentation for exporters is not enough,” he told me on The Core Report’s Weekend Edition, which discussed a Plan B for Indian exporters, who are desperately seeking lower tariffs or assistance from the Government.

Back to GST since that could affect household budgets. The proposal is to move most of the items in the 12% slab to 5%.

Currently, there are four tiers of 5%, 12%, 18% and 28%. 

There is a 12% compensation cess as well which applies to luxury or sin goods like automotive, aerated drinks and tobacco taking the total to 40% which as a slab will remain though the cess is set to go.

Some 99% of the items currently taxed at 12% could be moved to the 5% slab while 90% of taxable goods in the 28% slab could go to the 18% category, according to news agency PTI quoted in newspapers.

There is a possibility that cement, which is at 28% could go to 18% which should bring some cheer.

Why GST rates on cement, an infrastructure commodity, rank so high to start with is a question for another day.

Pratik Jain, partner at PWC India, told me Friday night that rate rationalisation had been in the offing for some time and welcomed the move to reduce the burden on items of mass consumption.

“Reforms should also include bringing petroleum products into the GST ambit, particularly natural gas and ATF, in addition to simplification of GST laws and reforms in tax administration,” he said.

Jain also pointed out, as others have, that the proposals will have to go through the GST Council which includes the states and when it meets next month. The actual rate reduction would come only after. 

So don’t make your shopping lists yet!

Reform In Rough Seas

The Prime Minister’s speech, in terms of its intent and timing, has set the right tone..

Such reforms are of course not easy to push through in the best of times.

Though India’s track record does suggest we have greater success in the worst of times, if the current tariff imbroglio can be called that.

Action now, even if quick may not save the day for industries like apparel and seafood exports, which are on the verge of significant job losses - interestingly, the PM also announced that youth joining the private sector workforce would get Rs 15,000 even as companies would be incentivised to do so.

But any medium to long-term change in ease of doing business will help industries bounce back faster or become more efficient and cost-competitive. And opening up further areas like nuclear, or speeding up semiconductors and more defence investments by the private sector will all add new jobs.

Coming to the GST cuts it has been in the offing for some time, though the announcement may be timed with local elections coming up in November. And of course a good Diwali gift, as the Prime Minister said. 

The good news is that most macroeconomic signals are positive, bolstered by India’s latest and surprise ratings upgrade after 18 years by Standard & Poors to BBB, something the Prime Minister also pointed out.

All of this is still not sufficient to be a 1991 moment which unleashed sweeping reforms in India. But businesses and the common man can surely look forward to a happier Diwali as these latest announcements transition to reality.

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FROM THE PERIPHERY

Modi Pushes Big For ‘Self-Reliance’ Amid US Tariff Storm

From made-in-India semiconductor chips to a task force to map economic reforms, Prime Minister Narendra Modi’s speech on India’s 79th Independence Day was focused on a “self-reliant” India. This, it appears, was in a clear response to the threat of a 50% tariff that US president Donald Trump announced only last week. 

Modi said, “The greater a nation’s reliance on others, the more its freedom comes into question… Self-reliance is not confined merely to imports and exports, or to rupees, pounds, and dollars. Its meaning is not so limited. Self-reliance is linked to our capability, and when self-reliance begins to diminish, capability too continually declines.” 

Other important announcements related to economic reform included self-reliance on energy, empowering the youth with jobs and agricultural reforms. 

Here are the economic highlights from his speech: 

India-made semiconductor Chip: Modi promised that a made-in-India semiconductor chip will be available in the market by the end of 2025. 

“And to my fellow countrymen, especially the youth, and to those across the world who understand the strength of Bharat’s technology, I say this—by the end of this very year, ‘Made in India’ chip, manufactured in Bharat by the people of Bharat, will be available in the market,” he said. 

Energy Independence Drive: While Trump’s tariff salvo was because of India’s dependence on Russian crude, the government now plans to take up multiple routes for self-reliance on energy. 

Nuclear: India, as was reported by newspapers earlier, will open up the nuclear energy sector to private players, to meet its nuclear energy targets by 2047. India plans to expand its nuclear power capacity by 12 times by then, and if it is able to, nuclear power could contribute as much as 5% to India’s energy needs.

“In the field of nuclear energy, we have introduced major reforms. We have now opened the doors of nuclear energy to the private sector as well; we want to combine our strengths,” the prime minister said. 

Undersea exploration: India will also start a National Deep Water Exploration Mission to find oil and gas reserves under the sea. 

Self-reliance in critical minerals: Modi also made a pitch for self-reliance on critical minerals saying, “Be it the energy sector, industry sector, defence sector or any other technology sector, today critical minerals play a very important role in technology and hence we have launched the National Critical Mission.” 

Under this mission, he said, exploration was already under way in 1,200 locations. 

Jobs for the youth: The prime minister also launched an employment scheme, which will give Rs 15,000 to every young Indian who gets a job in the private sector. The outlay of the scheme is of Rs 1 lakh crore and targets 3 crore Indians.

Agriculture: Modi said that the government has identified 100 districts in the country where there is relatively less agriculture and where farmers have fallen behind. In these districts, “we have started the PM Dhan-Dhanya Krishi Yojana. PM Dhan-Dhanya Krishi Yojana will provide a little help to those 100 districts of the country, then the farmers there will also be able to compete with other farmers of India”. 

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