Driven by structural reforms and macroeconomic stability, India has been able to maintain growth in the face of a global slowdown and uncertainties. The country stands as a strong contender to lead global economic growth. But, this warrants sustained macroeconomic stability, which can be attained by maintaining fiscal and monetary discipline.
The new government should aim for fiscal prudence by containing excessive tilt towards socialist spending. A focus on capital spending for meaningful growth in infrastructure capabilities is vital.
While it is essential to strike an optimal balance between social spending and infrastructure expenditure, the new government will have to be mindful of the fact that indirect tax collection is yet to reach the expected level. Therefore, it must prioritize fiscal prudence. Also, efforts should be made to keep inflation in check.
So far, the consumption has been a key growth driver for India, and investment has lagged. At present, multiple moving parts are at work, contributing to the moderation in consumption growth. This calls for a shift in focus to other growth drivers, including exports and investments. Data shows that private sector capex, which rose to Rs 3.7 trillion in 2010-11, has witnessed a declining trend over the past seven years, led by weak demand, high leverage, delays in land acquisition/clearances and a decline in project sanctions by banks.
New investment proposals in 2018-19 stood at a 14-year low, primarily attributable to a dip in the share of private sector investments. This calls for continued public sector contribution to create and enhance infrastructure which holds the potential to resurrect the slack in private sector capex.
Also, reforms will be needed to speed up new project sanctions and better credit flow to the private sector form important pillars for supporting the private sector capex growth. Major global central banks are now reverting to an easy monetary stance. This development along with data-driven approach by the RBI to determine interest rate creates room for the Indian central bank to reduce and maintain the interest rate at reasonable levels over the medium term—a credit-positive for the private sector. These factors should, in turn, prepare a conducive backdrop for a sustainable recovery in private capex over the medium term. In order to revive the housing construction sector, necessary steps to implement real estate regulations and tax incentives are warranted so as to bring back the buyer interest in the sector.
Enhancing productivity through reforms in the areas of Ease of Doing business (EODB), labour laws, land acquisition, simplification of FDI norms and strengthening of legislation to safeguard foreign investor interest are critical. Building on existing reforms to make them robust and effective is also as important as introducing additional reforms.
For example, the simplification of the GST structure and improvement in its coverage and thrust in the manufacturing sector via “Make in India” regime through labour and land reforms to support smaller manufacturing setups are some steps that can yield results.
Reforms to strengthen capital markets and deepen corporate bond markets will also be required in addition to the efforts being taken around the bank NPA resolution and the prevention of further NPA build-up. Since the implementation of the IBC, India has managed to improve its ranking in the world’s EODB. However, the country continues to lag in terms of time taken for debt resolution. A faster pace of resolution is necessary, which could be achieved by improving the procedural inefficiencies and enhancing the infrastructure at NCLT.
The need to bring economic growth back on track and sustain a reasonable growth over the long term while addressing productivity issues and job creation necessitates the effective implementation of existing reforms. It also addresses bottlenecks by introducing policies that are well-thought through and judiciously implemented.Anand Radhakrishnan is Managing Director and Chief Investment Officer— emerging markets equity, Franklin Templeton-India. Views are personal.