Exclusive | Lower regulatory costs helped NBFCs scale up over the last decade, says IIFL's Nirmal Jain

How do you assess the change in the Indian economy in the last 30 years of economic reforms?

The policy reforms since 1991 have improved the competitiveness of the Indian economy, which has driven a sharp pickup in growth. If we overlook the pandemic-impacted FY21, India’s nominal GDP has expanded by around 35 times (FY91-20) and exports have grown around 17 times (FY91-20) in the last three decades. The Balance of Payments crisis was the immediate trigger for the reform push in 1991 and in the last thirty years, India’s external account has steadily improved. India now has over $600 billion of foreign exchange and is among the top five nations in terms of forex reserves.

How have economic reforms touched individual lives?

Consumer choice has dramatically increased with the deregulation of several sectors for private sector participation. The opening of the economy to the private sector has created a lot of opportunities for both employees and entrepreneurs. Economic reforms have also created an impetus for capital market reforms, and space for new businesses to emerge. Private participation in entirely new sectors like banking, insurance etc. have happened and contributed to economic growth.

But, have the economic reforms really benefited India's poor?

While the benefits to the population may not have been uniform, the reforms have definitely benefitted all segments of the population. The per capita GDP of India has grown by around 22 times over the last three decades (FY91-20) and the rise in income has been broad-based (although not uniformly). Several studies point to poverty reduction in India. A UN study calculated that more than 270 million were lifted out of extreme poverty in the 10year period of 2005-06 to 2015-16.  Rising school enrolments, progress on child vaccination also point to a broad-based improvement.  Unfortunately, we do not have robust data on the income distribution of India which could have provided a clearer picture.

Which sector has benefitted the most?

Some of the sectors that have benefitted the most include Banks & financial services, automobiles, consumer goods etc. Healthy economic growth over the last three decades has improved household income and hence the affordability of several white goods and automobiles over the last three decades. The IT sector has also benefitted significantly from the reform process.

Which sector(s) are yet to benefit despite the reform wave?

The reform progress on some of the sectors like agriculture, power, logistics etc. continues to lag the overall reform momentum. This is partly because these reform measures need a broader Centre-State consensus. The relatively poor progress in these sectors is also hurting India’s productivity. High power and logistics costs make manufacturing uncompetitive in India. Further, the agricultural sector, which has less than 15% share in GDP, provides employment to over 40% of India’s labour force, partly because of insufficient jobs for unskilled/low skilled workforce.

What is the way out?

The progress on GST shows that we can have a consensus on policy measures that involve states. The government should use that experience to build consensus on policy direction. The ruling party at the centre is also in power in several significant states, presenting an opportunity to improve centre-state relations further.

Have we lost the momentum at some point?

The reform momentum has been fairly strong in the last three decades. Some reforms have been held back due to electoral compulsions. Ruling parties have not always commanded a good enough majority, though it must be said that the reforms were kicked off in 1991 by a minority government.

Where do we need corrective actions?

The government should avoid aggressive interpretation of laws and differentiate between business failures and frauds. The government should also make efforts to reduce tax disputes. That said, the government has announced some measures like faceless assessment, corporate tax rationalization etc. which should help improve the business environment. Investors and businesses need a stable policy regime and hence frequent changes in regulations should be avoided.

How has the NBFC sector evolved over the last 30 years?

In the 30-year period we speak of since reforms, the first two decades saw private banks emerge as a serious force in the economy. But NBFCs, helped partly by lower regulatory costs, have scaled up significantly in the last decade and emerged as a very significant instrument of rural credit extension. Various sub-sectors have emerged, including home, vehicle, consumer goods finance etc. Transactional friction in consumer financing has seen major reductions thanks to the initiatives of NBFCs, helping set off a consumption boom, and consumption growth has led to overall GDP growth.