India needs to create an ecosystem of continuous change. What India chooses now on the reforms and execution front will determine if it moves up on the potential growth curve, or if it goes back into the all too familiar cyclical roller coaster.
In the last couple of years, the government has successfully pushed through some key reforms such as the implementation of the Goods and Services Tax, the Insolvency and Bankruptcy Code, the Real Estate Regulation Act, a new monetary policy framework and e-auction of natural resources. The setting up of GST council and creating a mechanism to rank states on the basis of their business friendly environment were great initiatives towards co-operative federalism.
India’s rank in World Bank’s Ease of Doing business has improved 77 notches (from 142 in 2014 to 77 in 2018) helped by RERA and conversion of various business approvals/ declaration processes online. Some reforms have disrupted the economy in the short term and hence their benefits are yet to be felt.
Now, a host of other reforms is needed to offset the disruption and help the economy in making a smooth transition to the next level. For instance, encouragingly, half of the decline in inflation has been led by structural drivers. This is positive for the overall economy but has increased the real indebtedness of farmers. Reforms are needed to enable better income realization for farm output.
The rising inequality and the unique nature of a large un-organized sector in the Indian economy make it imperative for the new government to worry about the distributional aspects of growth. So far, India has already seen its own version of Universal Basic Income with the implementation of MGNREGA, free health Insurance, guaranteed income for small farmers and pension for unorganised sector workers along with free toilets, LED bulbs, LPG cylinders and so on. A robust social security net is a must for leveraging the demographic dividend. The JAM trinity (Financial inclusion, Aadhar and Mobility) should be used to prevent leakages in such schemes.
While we welcome the focus on distribution of income, the government still needs to prioritize productivity enhancing measures to boost growth. For the country to move up the income ladder (to be termed a middle and high income nation), it needs to grow above 8 percent sustainably, led by the strong productivity growth and investment in physical and social infrastructure. If history is any guide, the focus on distribution alone can stall the growth process and keep the country stuck in the low-income trap.
The financial system is a key backbone to support the growth. We need next generation financial sector reforms to fully leverage the strength of the private sector. The sector must develop to meet the sophisticated needs of large enterprises and provide better accessibility to small businesses. We need a deep and vibrant financial market which is well regulated but supports innovation. For example, we need substantial focus on securitisation and alternative assets funds growth.
The government has actively participated in infrastructure creation over the last few years. Resultantly, the share of government’s projects has overshot the private sector projects under implementation. Reforms are needed to increase private sector participation. The entire Public-Private Partnership (PPP) model needs to be revamped.
Good governance is basic to all reforms and changes in society. Most legislative reforms (apart from the desired land and labour laws which is fraught with the challenges of being in the concurrent list) have been materialized. Now, going ahead, steps are needed to repeal some of the archaic legislative laws and focus on administrative and judiciary reforms to improve the efficiency of both these machineries.
2018 brought to the fore India’s continued vulnerability to oil price movements. While we have successfully achieved food security, energy security still remains unachieved. The new government must not lose its focus on developing and strengthening the renewable energy in India.
India's share in global exports has plateaued. Domestic bottlenecks and soft world growth are some of the key drags. Anecdotally, the presence of domestic bottlenecks is supported by accounts of weak infrastructure facilities across sectors and a massive lack of innovation. All of this erodes the competitiveness of Indian exporters. Along with A focus on import substitution, equal attention is needed to promote additional foreign exchange generating avenues (for instance, tourism) and incentivising R&D in India.
And in all of this, India cannot ignore health, education and the on-going climate change, which lie at the heart of any prosperous economy. The top 10 most polluted cities of the world are Indian. The country ranks amongst the top three nations to see the highest number of deaths from air pollution. The country, which is home to 1.3 billion people and is still to climb the tall ladder of economic development, is already in the stressed water zone.
To sum, the point here is while a few big reforms have brightened the prospects for growth over the medium term, India needs to create an ecosystem of continuous change. What India chooses now on the reforms and execution front will determine if it moves up on the potential growth curve, or if it goes back into the all-too-familiar cyclical roller coaster.(The author is chief investment officer, SBI Funds Management. Views are personal.)