Economic expansion: Key reforms like IBC, GST, etc, are now past the initial stage where a lot of stakeholders struggle adjusting to the changes and resources are wasted in transitioning
By Rashesh Shah
Chairman and CEO, Edelweiss Group
The last six to twelve months have seen some challenging times for India. Markets have shown a lot of volatility and moved sideways. Growth momentum has, to some extent, started subsiding as teething troubles with new reforms have impacted the normal business flow partially. Asset quality challenges have continued to exacerbate. Flows from foreign investors have dried up and overall liquidity has also been tight. All in all, it has been a tough year for India.As we enter FY20, key questions remain on our ability to accelerate and broad-base the growth momentum going forward and also to re-establish India as a premier investment destination for overseas investors. It might be, at this point, helpful to look at some of these challenges to see where we are headed.
We have seen the enactment of several seminal reforms in the last few years including significant structural changes like GST, IBC and RERA. Each of these reforms have seen a fair amount of success but also thrown up some challenges which need some work.After some initial hiccups, GST is now firmly entrenched as the single tax law of the country. In the process, it has helped significantly enhance productivity and efficiency by removing barriers to goods movement across state lines and creating a seamless national market. At the same time, GST has also helped bring a larger section of the society under the tax bracket. As per reports, GST managed to bring in nearly 50 lakh new taxpayers into the tax net. As the process gets more streamlined and structured, this number is expected to rise even further.
At the same time, challenges persist around the complex compliance requirements that GST entails even today. This is something which must be actively targeted. Also, despite the recent rationalisation, there is further scope to reduce the number of slabs in GST. Despite these shortcomings, GST has initiated a widely-needed structural change in the economy and continues to be one of the most important reforms we have taken in some time.IBC has also plugged a gaping loophole in the economy. The absence of a strong bankruptcy law was a glaring miss for our corporate legal framework. While attempts had been made in the past to build a workable solution, they have not led to fruition. IBC has solved most of the shortcomings of the previous laws.
The very fact that banks are seeing promoters come up and repay loans to avoid going to NCLT shows the kind of strict regime that IBC has brought in. Besides, the higher than expected valuations of assets passing through NCLT is also indicative of the effectiveness of the law. There are still some changes needed but that is primarily dotting the I’s and crossing the T’s.RERA was another significant reform undertaken over the last two years. While its impact has been seen to a lesser extent than GST and IBC, the compliance levels among developers have seen a tangible shift. As the industry goes into some consolidation, we can expect the RERA compliant, customer-centric developers to do well.All in all, the reforms from the last few years are now taking concrete shape. They are now past the initial stage where a lot of stakeholders struggle adjusting to the changes and resources are wasted in transitioning. Incrementally, these reforms will only add on to the economic push and should be a key driver of the FY20 growth trajectory.
Asset quality challenges have been plaguing the economy for some years now. Most of this was an outcome of the haphazard lending followed in the post-2008 era. However, RBI’s pro-activism in getting these recognised from 2016 onwards has helped identify a large chunk of the problem. Any incremental large chunk recognition will be very limited going forward. With IBC in action and banks actively providing for the assets recognised, the incremental provision will be limited.As a result, bank credit is expected to start gaining traction once again as the capital can be used for growth purposes. This will help drive money to the productive sections of the economy and drive growth.
A study of FII flows over the last 20 years clearly shows that weak FII inflows/FII outflows are usually followed by bumper FII inflows as the attractive valuations become an ideal investment opportunity. Equity FII inflows of $0.7 billion in 2002 was followed by strong flows of ~$8 billion the following year, one of the biggest ever. Similarly, outflows of ~$10 billion in 2008 were immediately followed by inflows of ~$19 billion in 2009. More recently, outflows of ~$4 billion in 2016 were followed by inflows of ~$31 billion in 2017. Clearly, FII outflows are counter-cyclical in nature.With net outflows in 2018 to the tune of more than `1 trillion, it is expected that we will see strong inflows from FIIs this year. However, these are expected to gain traction only once the election process concludes in May and the uncertainty regarding the outcome settles down. Post-May, we expect a strong boost to foreign flows, particularly if a stable government takes power.
RBI has been actively working to address the challenges around liquidity. Overall tightness has given way to some unwinding and the recent spate of reforms announced should further add to the easing out of the liquidity tightness. While this is a gradual process, all indications are that we should be close to normalcy in the next few months.At the same time, the regulator has recognised the need to push the growth vector which has suffered to some extent in the last few months. With inflation holding steady, the recent rate cut will push the stalled growth momentum. The change in stance is a big positive and is expected to continue over the next few quarters.
The interim budget announced recently has an element of positivity for almost every section of society. However, most of all, it is a budget focused on the rural segment of society with several measures announced to drive growth in rural households. In recent times, rural consumption has lagged behind consumption in urban areas which has been largely healthy. The budgetary measure should help boost rural consumption and drive growth in the economy.The mildly expansionary nature of the fiscal policy coupled with the expansionary monetary policy stance is a situation which we have not seen in India in the recent past. They have mostly been at odds with each other, dictated by fiscal and inflationary compulsions. To that effect, both the government and the regulator have done well to address current concerns and drive the economy towards an expansionary economic policy.
An expansionary monetary and expansionary fiscal policy should give a huge fillip to growth and animal spirits. With several factors at play, all converging towards a growth booster, it is highly likely that we see a much stronger and much more growth-oriented India this year. While not all of the above factors may play out, there are enough vectors to drive forward the economy. If all of them do eventually play out, we could actually see a bumper year for the Indian economy.