Narendra Modi’s New Cabinet

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DELHI – On May 26, newly elected Prime Minister Narendra Modi was sworn into office along with his 23 union cabinet ministers and 22 ministers of state. In line with his campaign promise of “minimum government and maximum governance,” Modi significantly reduced the number of ministerial positions by merging several ministries together. According to Bloomberg, Modi’s new cabinet is the “leanest” in 16 years.

Earlier this year, a combination of factors, including corruption scandals and slow economic growth, led India’s electorate to dispose of the Indian National Congress (INC) led administration in favor of a majority government led by the Bharatiya Janata Party (BJP). Upon becoming India’s first majority government in 30 years, the BJP is now faced with a clear mandate to tackle various issues, including reducing outstanding government debt, reviving economic growth and attracting increased foreign investment to fulfill popular expectations for reform. In order to fulfill this mandate, Modi has appointed a number of colorful personalities to several key ministerial positions.

Key Personalities to Watch

Minister of Home Affairs Rajnath Singh – Singh, assisted by the Minister of State of Home Affairs, is charged with ensuring India’s internal security and overseeing the implementation of various domestic policies. With control over India’s national police force, maintaining order and stability in areas such as Jammu and Kashmir will inevitably be a key concern for Singh this year. Campaign rhetoric suggests that Singh will also seek to strength and improve India’s agriculture sector alongside his security-related duties through the establishment of new low-interest loans for farmers, a new minimum support price, an agriculture income insurance scheme and policies to encourage organic farming and the increased usage of the country’s banking system among farmers.

Minister of External Affairs Sushma Swaraj – Swaraj will take responsibility for India’s foreign relations and, as one of several female cabinet members appointed by Modi, the first woman to hold the position of Minister of External Affairs. As one of the most powerful female figures in the BJP, Swaraj will face a number of challenges upon taking office, including managing India’s sensitive ties with Pakistan and China, and helping to implement the country’s General Anti-Avoidance Rules (GAAR).

Minister of Finance & Defense Arun Jaitley – The Ministry of Finance and Ministry of Defense are two of the most senior union cabinet ministries to be merged under Modi. By becoming the head of these two key ministries, Jaitley has in practice become the second most important political figure in India after the prime minister. In his new post, Jaitley will exercise control over all financial and commercial policies mandated by the Ministry of Finance, and have the power to influence policies regarding trade restrictions, taxation, banking and industry regulations – all of which will have a profound impact on India’s investment climate.

Before entering politics, Jaitley enjoyed a successful legal career and authored a number of publications on legal and current affairs. As a member of the BJP since 1991, he has served in a number of key ministerial positions, including as disinvestment (established 15 years ago for government to liquidate an asset or subsidiary), commerce, law and justice minister.

Fixing the Economy

One of the biggest policy aims for the incoming Modi administration will be to improve the country’s economic performance and combat corruption in the central government.

The first major challenge for Modi’s administration, and Finance Minister Arun Jaitley in particular, will be to construct India’s 2014-2015 fiscal budget, which is likely to be released this July. According to a quarterly report published by the Ministry of Finance in February, the Indian Central Government’s gross fiscal deficit currently stands at around US$92 billion – the equivalent of nearly 4.8 percent of the country’s GDP – which will make the task of formulating India’s fiscal budget especially tricky.

The report also indicated that the country’s economic growth rate has been declining sharply since 2011 from a high of 10.1 percent in 2011 to 4.4 percent in the first quarter of 2014. In order to revive growth, the Finance Ministry will need to develop a positive and effective working relationship with the Reserve Bank of India (RBI) headed by Dr. Raghuram Rajan. Together, these two organizations will need to address issues of bad loans, the reform and recapitalization of public sector banks, making credit more accessible to rural populations and increasing the global competitiveness of India’s banking sector vis-a-vis other financing sources.

Historically, India’s low interest rates have allowed the government and private enterprises to make cheap loans, resulting in high inflation and a growing amount of bad loans. The RBI raised interest rates at the beginning of this year in an effort to curb inflation, but this policy has been widely criticized by the business community, which believes increased interest rates will ultimately discourage household investment and thus economic growth. This view appears to be shared by Jaitley, who told the Times of India, “You can’t have a competitive economy with high interest rates.”

Foreign investors still need to wait to see how many investment incentives and opportunities Jaitley’s economic policies foster, but it is possible to speculate upon his stance on certain economic issues. According to the Times of India, Jaitley believes that immediate policy steps should include rebuilding the investment cycle and making India’s fiscal and taxation policies more clear and stable to attract foreign investment.

With Modi’s cabinet focused on establishing a special investigative team (SIT) to recover undeclared income from international tax havens during its first meeting, foreign investors will be watching closely as long-term policy initiatives and an overall economic direction take shape.

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