The new fiscal year has got off to an eventful start, building on encouraging macro indicators and rising confidence and conviction in the Indian economy. The Bankruptcy Code and the Monetary Policy Committee have already been implemented in 2016. In 2017, the economic architecture will get a further boost with the hugely anticipated GST, which is a path-breaking reform for our nation
Riding on mega achievements, progressive reforms and strategic initiatives over the last three years, the Indian economy has certainly picked up speed.
The growth revival visible in high frequency indicators confirm that the currency exchange-induced disruption was indeed short-lived; and efficient re-monetisation has restored economic normalcy earlier than anticipated.
India's structural strengths of a young demography, high technical and engineering skills, large consumer base... have in my opinion now placed the nation on a pre-ordained growth trajectory.
The latest GDP release for Q3FY17 reinforces this, with growth clocking a robust 7.1%YoY in the quarter. Armed with long-term benefits of improved tax compliance, greater transparency, superior governance, deregulation and digitisation, India can be expected to maintain its position as the fastest growing world economy in the coming years.
PM Modi's I-D-E-A
Over the past three years, PM Modi has orchestrated an I-D-E-A for India characterised by:
- I - International collaboration-focused and proactive policymaking—for enhancing trade and commercial linkages with partner countries.
- D – Domestic reforms focused on action and outcome—which is not only creating jobs, but also invoking our native entrepreneurial spirit among MSMEs and startups.
- E- Ease of doing business through competitive federalism—with a single-minded focus on improving the business environment.
- A – Active consensus-building on critical policies.
Any brilliant IDEA needs to further build confidence and conviction through communication, and relentless execution—with short-, medium- and long-term results. I believe that short- and medium-term outcomes and results are already visible. It's no surprise that India emerged as one of the fastest growing economies in the world in 2016, and has retained its top spot since then.
These winds of change will continue to play a latent, but potent role in the coming years. India's structural strengths of a young demography, high technical and engineering skills, large consumer base among others, have in my opinion now placed the nation on a pre-ordained growth trajectory. The sustainability of this growth story is further supported by factors of:
- India's improved macro-economic stability reflected in low inflation, low CAD and fiscal prudence as reinforced in Budget FY18.
- A governance regime that has leaned away from unaffordable populism and cronyism.
- Variegated reform mix with focus on micro enablers, macro stability, institution building, and behavioral shifts.
- Long-term focus on growth via programs of Smart Cities, Make in India, Start-up India, Digital India.
The economic outlook for FY18 continues to appear promising, owing to a combination of structural (listed above) and cyclical factors. The latter are in fact anticipated to drive an ever more substantive recovery in both the consumption and investment cycles over the next 12-18 months via the following "short-term" enablers:
Pay commission implementation to support consumption growth
The central government has partially implemented the 7th CPC from Aug-16 (with implementation of 16% hike in pay, 63.5% increase in allowances, and 24% increase in pensions). This will benefit 4.7 million central government employees (including defence and railways) and 5.3 million pensioners. Total outgo for Centre (including Railways) has been estimated around ₹85,000 crore.
These payouts will now be followed by hike in allowances in FY18 at the Centre accompanied by state-level pay commissions over the next 1-2 years. Both are expected to support private consumption, especially discretionary demand, further.
Interest rate support to trickle down
Between Jan-15 and Oct-16, the RBI reduced repo rate by a cumulative of 175 bps on the back increasing comfort on the inflation scenario. Since then, banks have passed on 60 bps through cuts in base rate and another 95-105 bps via cuts in MCLR. This will boost leveraged consumption and help in reducing corporate leverage.
Public investments to drive "crowding-in" impact
Over FY17 and FY18, budgetary allocation for capital expenditure is slated to grow by 11%. The total allocation for infrastructure development and transportation sector in FY18 is likely to spur economic activity across country and create job opportunities
In the spirit of competitive federalism, state governments have also seen healthy spending towards asset creation. As of Nov-16, state governments' growth in capex was up 22%YoY as compared to a growth of 10% in Nov-15.
The support from domestic enablers, accompanied by the rollout of the GST in the coming months and wider implementation of the Insolvency and Bankruptcy Code, are expected to enhance productivity gains for the economy and boost short- to medium-term growth potential. The economic winds for the Indian economy have indeed changed favourably. The next one to two years will now witness these winds gather velocity to push India onto a higher growth stratosphere.