India has witnessed some of the major economic reforms in the past 2 years. We all know it began with demonetization. Then came the GST. And the long-festering Twin Balance Sheet (TBS) problem was decisively addressed by sending the major stressed companies for resolution under the new Indian Bankruptcy Code and implementing a major recapitalization package to strengthen the public sector banks. As a positive consequence the Indian economy started to accelerate by the second half of the year.
GST is actually a cornerstone development for the Indian economy. Launched in July 2017, it actually shaped the way things are going to be in the future for the Indian Industries and the business. Implementing GST was a huge step owing to its scale, scope,and complexity, the transition unsurprisingly,encountered challenges of policy, law, and information technology systems, which especially affected the informal sector. The informal sector was most adversely affected as compliance and migrating to the new systems of things was not readily accepted by the masses operating in the informal sector. This was just the initial hiccups and things were destined for a glorious ending anyways.
Along with GST came the prompt action of government to tackle the issue of twin balance sheets or what is commonly known as TBS. This phenomenon actually was one of the biggest obstacles that was preventing the Indian economy from growing.On the 4 R’s of the TBS—recognition, resolution,recapitalization, and reforms—recognition was advanced further, while major measures were taken to address two other R’s. The new Indian Bankruptcy Code (IBC) has provided a resolution framework that will help corporates clean up their balance sheets and reduce their debts. And in another critical move, the government announced a large recapitalization package (about 1.2 percent of GDP) to strengthen the balance sheets of the public sector banks (PSBs). As these twin reforms take hold, firms should finally be able to resume spending and banks to lend especially to the critical, but-currently-stressed sectors of infrastructure and manufacturing.
On the macro economic level this year has been sort of a roller coaster ride. The state of economy decoupled for some time owing to the chaos created by the economic reforms that the government has just put in. Even After that the Indian Economy remained the second best performer globally. Holistically speaking the macro economic fundamentals of the country became even stronger.The reason lay in the series of actions and developments that buffeted the economy: demonetization, teething difficulties in the new GST, high and rising real interest rates, an intensifying overhang from the TBS challenge, and sharp falls in certain food prices that impacted agricultural incomes.
In the second half of the year, the economy witnessed robust signs of revival. Economic growth improved as the shocks began to fade, corrective actions were taken, and the synchronous global economic recovery boosted exports. Reflecting the cumulative actions to improve the business climate, India jumped 30 spots on the World Bank’s Ease of Doing Business rankings, while similar actions to liberalize the foreign direct investment (FDI) regime helped increase flows by 20 percent. And the cumulative policy record combined with brightening medium-term growth prospects received validation (as argued for in Box 1 of last year’s Economic Survey, Volume I) in the form of a sovereign ratings upgrade, the first in 14 years.These solid improvements were tinged with anxieties relating to macro-economic stability. Fiscal deficits, the current account, and inflation were all higher than expected, albeit not threateningly so, reflecting in part higher international oil prices—India’s historic macroeconomic vulnerability.
These dualities of revival and risk have been reflected in the markets, and in market analysis. For example, bond yields rose sharply, leading to an exceptionally marked steepening of the yield curve—even as stock prices continued to surge. This created a very positive scenario for the investors. However the global monitors warned the world to tread with caution for a short while, when investing in India. Its quiet natural as chaos even for a good cause is something to be wary off. In the climate of business uncertainty its always wise to tread with caution.Despite major policy reforms and even in the absence of major new actions, the policy agenda remains full. Over the coming year, the government will need to focus on the 4 R’s, ensuring that the process of resolving the major indebted cases and recapitalizing the PSBs is carried to a successful conclusion, while initiating reforms of the PSBs that will credibly shrink the unviable ones and signal greater private sector participation in the future. The government will also need to stabilize GST implementation to remove uncertainty for exporters, facilitate easier compliance, and expand the tax base; privatize Air-India; and stave off any nascent threats to macro-economic stability, notably from persistently high oil prices, and sharp, disruptive corrections to elevated asset prices.
If these objectives are achieved, the world economy maintains its growth momentum, and oil prices do not persist at current levels, the Indian economy should resume converging towards its medium-term growth potential that previous Economic Surveys have estimated to exceed 8 percent. India would then regain its status as the fastest growing major economy. The present regime of India is leaving no stones un-turned to make India an economic super power. We as citizens and corporate entities just have to support the efforts of the government. A point to be noted here is that all the policy implementation that the government is doing is for the benefit of its citizens and economy. The business environment of India is such, that it poses resistance to every good policy move that the government does. Never the less the business concerns and the Indian Public are now seeing the benefits of the reforms as the nation surges forward in the global business scene. Our intention with making this information available for our readers is only that they should also be aware of the steps that their elected government is taking to make this nation a better place to grow. We really hope to see some good work being done in the times to come.
