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India picks up pace on economic overhaul with a slew of big announcements

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NEW DELHI — After months of criticism for not moving aggressively enough on promises of an economic overhaul, India's new prime minister has announced a string of policies designed to kick-start Asia's third-largest economy.

Over the past week, Prime Minister Narendra Modi has unveiled an overhaul of India's archaic labor laws, freed diesel prices from state control and signed an executive order promising to open India's coal industry to private companies. He also appointed Arvind Subramanian, a respected Washington, DC-based economist, as the country's top economic adviser.

Modi, who led his Bharatiya Janata Party to a landslide election win in May on promises that he would re-energize India's stumbling economy, faced a flurry of criticism after his July budget failed to provide new direction.

But that appears to be changing, reigniting optimism that India can lift its economic game.

Though India's economic growth was not far behind China's last decade, it slumped over the past few years, hurt by policy gridlock, weak investment, high inflation and epic corruption. Lack of progress over decades is highlighted by slow poverty reduction. In 1978 some 99 percent of the population lived on less than $5 a day, according to World Bank figures. By 2011, that poverty rate was barely changed at 95 percent.

Experts say that the BJP's recent successes in two state elections have given Modi greater political power to implement his agenda. It has increased his party's representation in the upper house, which can delay legislation, and also puts two more states closer in step with the federal government.

The government now has the freedom "to take stronger, bolder steps," said D.K. Joshi, chief economist at the financial research firm Crisil.

Modi, who has promised to make India a global center for cheap manufacturing, announced a major overhaul of labor laws last week, hoping to attract investors.

India's onerous labor laws, many written when the country was a British colony, require reams of paperwork and strictly regulate all hiring and firing of employees, often deterring companies from bringing in new staff.

That, Modi said in a New Delhi speech, needs to change.

"Ease of business is the first and foremost requirement" to increase India's manufacturing strength, he said.

Creating more jobs is a high priority in India, where some 13 million young people join the workforce each year.

PHOTO: FILE - In this Thursday, Sept. 25, 2014 file photo, Indian Prime Minister Narendra Modi addresses business leaders as he launches his "Make in India" initiative, prior to his scheduled departure to the U.S. in New Delhi, India. After months of criticism for not moving aggressively enough on promises of an economic overhaul, Modi, who led his Bharatiya Janata Party to a landslide election win in May, announced a string of policies designed to kick-start Asia's third-largest economy. Over the past week, Modi has unveiled an overhaul of India's archaic labor laws, freed diesel prices from state control and signed an executive order promising to open India's coal industry to private companies. Modi,  on promises that he would re-energize India's stumbling economy, faced a flurry of criticism after his July budget failed to provide new direction.  (AP Photo/Saurabh Das, File)
FILE - In this Thursday, Sept. 25, 2014 file photo, Indian Prime Minister Narendra Modi addresses business leaders as he launches his "Make in India" initiative, prior to his scheduled departure to the U.S. in New Delhi, India. After months of criticism for not moving aggressively enough on promises of an economic overhaul, Modi, who led his Bharatiya Janata Party to a landslide election win in May, announced a string of policies designed to kick-start Asia's third-largest economy. Over the past week, Modi has unveiled an overhaul of India's archaic labor laws, freed diesel prices from state control and signed an executive order promising to open India's coal industry to private companies. Modi, on promises that he would re-energize India's stumbling economy, faced a flurry of criticism after his July budget failed to provide new direction. (AP Photo/Saurabh Das, File)

Modi's announcements came as the economy showed some signs of revival, with inflation plummeting to five-year lows because of falling global oil prices.

Taking advantage of that dip in crude prices, the Indian Cabinet freed diesel prices from government control over the weekend, targeting one of India's costliest subsidies.

The subsidy, along with high international oil prices and a dependency on petroleum-based fuels, has caused India's trade deficit to balloon in recent years, reaching $14.3 billion in September.

Joshi said that highly subsidized diesel prices had encouraged consumers to guzzle the fuel, adding greatly to the government's subsidy bill.

"It'll send a signal to consumers to conserve fuel" while easing the government's subsidy burden, Joshi said.

The appointment of development economist Arvind Subramanian as the country's chief economic adviser was also welcomed by industry.

Subramanian, a senior fellow at the Peterson Institute for International Economics in Washington D.C. has worked at the International Monetary Fund and taught at Harvard's John F. Kennedy School of Government. The widely published economist is seen by many in business as well equipped to guide India's economic makeover.

"For an economy struggling to claw out of its deepest slump in 25 years, it's a pleasant sight to spot a flurry of reformist intent," the Hindustan Times said in a recent editorial.

Meanwhile, this week's executive order that will eventually allow any Indian company to mine and sell coal, opens up an industry nationalized more than four decades ago. It also sends a strong signal about a shift away from highly restrictive industrial regulations.

Current laws allow only certain private companies to mine coal, and then only for their own use, with state-owned Coal India Ltd. dominating commercial mining.

Most of India's power plants are coal-fired and the new regulations are expected to boost the country's inadequate power supply, a big obstacle to manufacturing in India, by encouraging investment in new generation capacity. Officials have not said when the executive order will go into effect.

Joshi said the flurry of economic announcements are incremental steps but "they all add up significantly" to make the country attractive to investors.

But he said one major issue has yet to be addressed: India's poor infrastructure, from its highways to its electricity grid. India cannot become a manufacturing power until those problems are faced.

"Inviting someone to do business isn't sufficient," he said. Without good roads, reliable power and better ports, "you cannot become a manufacturing power."

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