Three years ago, the country ran the risk of a sovereign ratings downgrade that could have led to India’s isolation from global capital markets.
With the Modi government embarking on its fourth year of governance, it would be interesting to introspect on the last three years of policy trajectory, outcomes, and the most likely way forward.
Three years ago, the country ran the risk of a sovereign ratings downgrade that could have led to India’s isolation from global capital markets. However, in contrast, the current situation is rife with speculation about the possibility of a sovereign ratings upgrade. Keen investor interest is chasing India with its noticeable arrival on the international high table, amid successful transformation of the economy from a fragile-five in 2013 to a global macro hotspot today.
Several decisive policy decisions were taken by the government in these three years, which have brought about this transformation in the country’s economy. To accomplish this, the policymakers focused on removing economic bottlenecks by embracing the principle of festina lente, or make haste slowly, and touched upon various aspects of reforms.
The new government has invested considerably in International collaborations by leveraging the diplomatic channels for enhancing trade and commerce, thereby ensuring an active role in the global geopolitical map. Additionally, there have been significant domestic reforms that are sure to have measurable impact in the near-term.
Structural macro reforms like the fuel price deregulation, GST, Skill India, Make in India, and re-contouring of the FRBM platform will help boost India’s potential GDP growth by at least 1.5% in the medium-term.
Similarly, micro reforms like the UDAY scheme, Smart Cities, REITs, Direct Benefits Transfer and crop insurance are steps to enhance sectoral efficiencies. Institutional reforms like setting up of Monetary Policy Committee, NITI Aayog, codification of insolvency and bankruptcy procedures, and creation of MUDRA Bank and RERA are some vital steps taken by the government in order to sustain 8%+ GDP growth in the future and positively 9-10% beyond 2020; administrative reforms like e-biz portals, redrawing of the auction mechanism for natural resources and reforming APMCs have proved to be successful in addressing objectives like curbing inflation, etc, in a meaningful manner.
Most important, the behavioural reforms undertaken by the government like the JAM Trinity have helped in leapfrogging financial inclusion. Additionally, demonetisation is expected to drive Swachh Vitteykaran, the move having added 9.1 million new taxpayers in FY17, representing an 80% jump over the previous year. Going forward, this is likely to boost India’s relatively low tax/GDP ratio of 11.3% in FY17.
One of the first objectives of the government was to improve ease of doing business, around which policies like GST, FDI liberalisation and digitisation have been tailored. It has also ensured that this percolates to the state-level through competitive fiscal federalism. Additionally, active consensus building on critical policies like the GST, Bankruptcy Code and FDI bring out the importance of political unison.
The reform agenda has made considerable progress and the next few years will see renewed focus on reviving private investments and boosting job creation. Programmes like Skill India will add impetus to employment which will be crucial in reaping benefits of the demographic dividend that India is expected to enjoy until 2040.
Against the backdrop of the changing nature of jobs in a world which is at a cross-roads of globalisation, Industrial Revolution 4.0, and protectionism, policy focus on boosting employment and nurturing MSMEs; as an extension of existing policies, will yield desired outcomes.
The NDA Government is now in power in 16 states and reforming labour laws should be accorded top priority. States like Rajasthan, Gujarat, and Madhya Pradesh have already made a beginning with labour market flexibility. These initiatives need to percolate to other states in order to bring out the best practices. States need to amend archaic provisions in the Factories Amendment Bill, Industrial Relations Code as well as Shops and Establishments Bill to synchronise with the needs of a modern economy.
MSMEs generate close to 45% of the total industrial employment and are critical for the ground level consummation of the ‘Make in India’ dream. While GST will provide a shot in the arm, cluster-based development will help MSMEs reap economies of scale. Furthermore, a specific focus financing through attractive corporate tax structures, building of robust ratings and exchange trading culture, will help strengthen these enterprises.
Today, vocational training under skill development is critical wherein disruption and exponential change is the new paradigm. I believe that we will see the policy emphasis on DICE (Design Innovation Creativity led Entrepreneurship) getting impetus through ‘Stand-up India’ and ‘Start-up India’ programmes.
The economic energy in the existing team of policy architects is palpable and infectious. I am confident that the government is now ready to take the next leap. India took 31-years to increase the size of its economy by 10x to a staggering $2.3 trillion, currently. India’s next phase of 10x transformation to a $20 trillion economy will take less than half the time.