'Underwhelming' reform process

Over the past few days, Modi's right-wing Bharatiya Janata Party (BJP) has announced a string of reforms, including plans to overhaul the country's labor laws, open India's coal industry to private companies, free diesel prices from state control, and make scrutiny of factories transparent to curb harassment by government inspectors.

The announcement comes after the government faced criticism over what some view as a slow pace of economic reforms. Modi and his Hindu nationalist BJP swept to power in a landslide election win in May on promises that he would revitalize the Indian economy.

Shilan Shah, India economist at London-based Capital Economics firm, explains in a DW interview why the most significant of the recently introduced reforms is the deregulation of diesel prices, and argues that the government needs to cut bureaucracy and address the issue of land acquisition in order to foster a vibrant industrial sector.

DW: What key reforms has the Indian government unveiled in recent weeks?

Shilan Shah: Arguably the most significant reform that has been introduced is the deregulation of diesel prices, which effectively brings an end to the fuel subsidy program. This has followed other, smaller reforms, which include the partial opening up of the defense and railways sector to foreign investment; the decision to privatize part of Coal India; and small changes to labor laws that allow for more overtime.

Why do you think it important to scrap fuel subsidies?

The decision is significant as it should help bolster investment in the energy sector and improve India's public finances. Diesel subsidies typically account for 8 to 10 percent of total government revenues, and this saving can now be geared towards public investment.

It seems that one of the priorities of the government is to increase the amount of foreign direct investment (FDI). How is New Delhi aiming to achieve this goal?

There are a number of ways with which the government can attract FDI. Land acquisition and more flexible laws that allow firms to hire and fire staff without such strict regulation are perhaps the two most important areas. Some progress has been made in liberalizing key sectors such as defense and insurance, but in all, the reform process has so far been underwhelming.

The government also announced measures to pave the way for private companies to sell coal. What impact is this likely to have on the coal mining market?

The decisions to partially open up the coal market and revoke illegal licenses are clearly steps in the right direction. Greater competition should help to bring local prices down, and also reduce India's need to import coal, which should lead to a narrower current account deficit.

Analysts warn that PM Modi does not yet have enough upper house seats to push through more politically-sensitive changes that are key to getting growth back on track. What is your view on this?

This is indeed a big constraint. The upper house has a great deal of say on a number of issues that have been de-centralized to state governments over the past few years, including land acquisition and labor laws. The BJP's victories in two state elections last month will help to redress the balance in the upper house, but there is still a long way to go before it achieves a majority. Given the rolling nature of state elections, this seems unlikely until 2017 at the earliest.

What does India need to further do to unleash its economic potential?

It needs to cut bureaucracy and address the issue of land acquisition in order to foster a vibrant industrial sector. A further opening of key sectors such as energy, financial services to FDI will help to address the issue of a lack of investment.

Finally, more flexible labor laws are needed to encourage companies to expand and take on more staff and therefore benefit from economies of scale. But these are all politically-sensitive issues that require a huge deal of cooperation from the different strands of government – something that has proved elusive over the past few years.

Shilan Shah is India economist at Capital Economics, a UK-based economic research consultancy.