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India's economy is reeling from recent reforms, but business leaders want more

Key Points
  • India has embarked on a series of dramatic policies expected to transform the entire culture of doing business, but its economy is feeling the sting
  • Ongoing pressure spurred by demonetization and supply chain disruption ahead of July's Goods and Services Tax (GST) pushed gross domestic product growth to a three-year low
  • Still, business leaders called on New Delhi to push through even more reforms

NEW DELHI — Executives across India Inc voiced broad-based optimism about the country's economic growth at the World Economic Forum's summit here in the Indian capital.

But all of that positivity went hand-in-hand with a message to the government: It's time for more game-changing reforms.

India's Prime Minister Narendra Modi
Adnan Abidi | Reuters

As the world's largest democracy embarks on a series of dramatic policies expected to transform the entire culture of doing business, its economy is feeling the sting. Ongoing pressure spurred by demonetization and supply chain disruption ahead of July's Goods and Services Tax (GST) pushed gross domestic product growth to a three-year low in the April-June quarter. Further compounding the situation are sluggish private investment and weak job creation.

At a CNBC panel on Friday, leading Indian business players described those issues as short-term obstacles essential for long-term gain.

"We're going through the pain, we'll see whether it takes one or three quarters," said Sanjiv Bajaj, managing director at Bajaj Finserv, which is a financial services firm part of the larger Bajaj conglomerate. "The impact of the net change will be significantly positive. A year down the line, we'll be talking with a very positive feel than where we are today."

Adi Godrej, chairman of The Godrej Group, a corporation with interests in real-estate, household items and chemicals, said he expects GDP to improve as early as the the second half of this year.

"This whole question mark about the Indian economy came from weak June growth," he explained. "In the manufacturing sector, the new GST rate was less than the combination of earlier excises, so obviously there was a lower destocking of those items and lower clearance, which affected GDP of that month."

That won't be the case going forward, he continued, adding that Godrej's various companies will clock in higher sales in the coming months.

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GST can ultimately boost economic growth, said Shobana Kamineni, president of the Confederation of Indian Industry. "What's going to happen is a reorganization of the entire supply chain network — consolidation of formal retail, movement of goods — the entire transition is for the future, and that's where GDP will kick up at least two points."

Throughout this week's two-day India Summit, Prime Minister Narendra Modi's administration was widely praised for finally unleashing big-bang reforms deemed crucial for modernization. GST aside, New Delhi is also cleaning up debt-saddled public sector banks and it introduced a new bankruptcy law late last year to resolve the nation's $150 billion bad debt overhang. The government is cognizant of the economic slowdown, but it says the downturn couldn't be avoided.

"When you're introducing radical changes, you have to expect unintended consequences of all kinds," Sanjeev Sanyal, principal economic advisor in the department of economic affairs at India's finance ministry, said at CNBC's panel.

"The only way to introduce something like a banking sector cleanup or GST was to not keep thinking about it but actually do it and fix it along the way — sort of a feedback loop approach. This may look awkward in the short term, but it is the only real way you can introduce major changes in a country like India."

Next on the to-do list

New Delhi's work is far from over, however, with many calling for urgent labor and land reforms — issues Modi attempted to address in recent years but failed amid massive public backlash.

On land, his government is looking to enable states to acquire private farmland for development projects, a move that critics call a land grab. But Modi must also ensure efficient utilization of public land, argued Godrej. "How we use our land is very important, whether it's for agriculture or animal husbandry. In housing, we're very inefficient as to how much housing we build on unit land compared to other countries."

Sanyal shared those thoughts, saying India needs "more efficient cities rather than theoretical ideas from the 1950s that are embedded into urban design master plans."

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The northern city of Chandigarh — designed by Swiss-French architect Le Corbusier and boasting world renowned architecture — is "the worst possible design for a country like India," Sanyal continued, adding that metropolises must prioritize addressing density problems.

Modi's administration also seeks to alter labor regulations that will allow employers to hire and fire people more easily. That's one of India's biggest challenges, according to Bajaj. "If we are able to cut through the set of issues related to labor ... that will be the single biggest additional driver for employment."

"Things like GST are important. But now companies need to look inward, and the big ticket we can never ignore is jobs," echoed Kamineni. "This is the needle that we constantly have to push and unless we make it easier to do business, it's going to be impossible to create jobs."