India Market Watch: India’s Economy to Grow, New Initiatives for Infrastructure Projects, Bike-Taxi Services Go Nowhere

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IMF: India’s Economy to Grow, but Banking and Tax Reforms Needed

The International Monetary Fund (IMF) projects an optimistic 7.5 percent growth rate for India in the fiscal year of 2016-2017 – up from 7.3 percent in 2015-2016. This assessment has been shaped by the sharp fall in global oil prices, stronger than expected domestic demand, and positive policy actions from the Modi-led government. The central Reserve Bank of India’s (RBI) tight monetary policy has also lowered consumer inflation to meet the 5 percent target by March 2017.

Prominent among the challenges affecting the Indian economy, as highlighted by the IMF, is the weakened asset quality and profitability of India’s public sector banks due to bad loans. This has led to more cautious lending, impacting future economic growth. Paul Cashin, the IMF India Mission Chief, has thus recommended “increasing capital buffers in public banks” and “implementing governance reforms…along with the new bankruptcy law”. The long anticipated implementation of the Goods and Services Tax (GST) is also desirable, not least because it will create a single national market in India. Better administration of the large food and fertilizer subsidies could also act to improve tax revenues. Lastly, greater public infrastructure investment to address supply-side challenges and timely project implementation is a prerequisite to boost private investments and the indigenous industry.

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New Initiatives Announced for Infrastructure Projects in Union Budget

In his budget for 2016, presented on February 29, the Union Minister of Finance, Arun Jaitley, announced the launch of a credit rating system for infrastructure projects. Jaitley stated that the proposed system will emphasize “various in-built credit enhancement structures… instead of relying upon a standard perception of risk which often result in mispriced loans”. This would allow infrastructure projects to gain access to credit disbursed from multiple sources at more competitive rates. Questions abound as to how the new rating system will differ from the existing rating scale utilized by rating agencies. Another issue arises with regards to its applicability to operational projects as well as those currently under-development.

Two other initiatives have been introduced by the new budget to boost the infrastructure sector. One is the introduction of a Public Utility (Resolution of Disputes) bill to streamline institutional arrangements for dispute resolution in infrastructure-related construction contracts, Public-Private-Partnerships (PPPs) and public utility contracts. The second initiative refers to new guidelines for the renegotiation of PPP concession agreements, which will now assess the long-term nature of such contracts and potential uncertainties of the real economy with emphasis on transparency. Further clarification on all these initiatives is awaited.

Related Link Icon-IBRELATED: India’s Economic Initiatives: A Magnet for Investments
Authorities Thwart UberMoto and Olabike’s Efforts to Start Bike-Taxi Services

Uber, the global transport aggregator, introduced its pilot bike-taxi service in Bangalore on March 4. The service was offered at rates as low as US $0.045 per km (Rs 3 per km), with a base minimum fare of US $0.224 per km (Rs 15 per km). Uber’s primary domestic rival, Ola, also set out to provide the same service at an equally competitive rate of US $0.030 (Rs 2 per km), with a corresponding base fare of US $0.447 (Rs 30 per km). Both firms sought to capitalize on the inefficient features of India’s transport landscape, highlighting the regulatory and safety aspects of their respective services. These include filtering masks, helmets for passengers, and the standard features present in their other service categories.

Nevertheless, in a dramatic turn of events, both companies had their bike-taxis seized by the Karnataka state transport authorities on March 5. The Karnataka state has declared them illegal; in violation of the Motor Vehicles Act and operating without the necessary permits. Local bodies have indicated that none of the motorbikes are health-insured.

This is yet another instance where app-based companies such as Uber have failed to factor in India’s complex regulatory environment and difficult e-commerce compliance standards. As of now, Uber has stated that the company did not receive any communication from the Karnataka transport department. The company also highlighted the fact that UberMoto was a pilot service and not a full-fledged service launch. Ola has also declined to comment on the matter.

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