Is India a shining star in 2016?

It’s always a challenge for the elected government to do a balancing act between common man (social needs) vs businesses expectations. Poverty elimination, inclusive development, employment generation, creation of entrepreneurial opportunities, provision of basic infrastructure (education, healthcare, housing), support infrastructure (roads, electricity, drinking water) and maintaining law and order are some of the key priorities of Government to fulfill common man social needs, however businesses look for clear laid out industrial, business (and trade) policies, faster (minimum and easy) regulatory approvals, easy taxation and compliance structure, excellent industrial infrastructure (power, water, transport), good governance from local as well as center (and state) government, adherence to trademark and copyright laws and strong judiciary system. Balancing on both these fronts is not an easy task for any Government to ensure that both common man and businesses are happy and satisfied.

In last 18 months, India’s Prime Minister; Narendra Modi has attempted to action on many of these parameters. He has outlined the vision of cooperative federalism through the creation of Niti Ayog as successor to the Planning Commission. He has launched flagship programmes such as Swachch Bharat Abhiyan, Digital India, Make in India, Skill India and the latest in the series is the upcoming 'Start-up India' initiative. He also introduced Pradhan Mantri Jan Dhan Yojana (as part of financial inclusion) where over 10 crore accounts of the weaker sections have been opened. Modi’s competitive and cooperative federalism trump card is beginning to work if one looks at the results of the first ranking of states on the ease of doing business where India has improved by 12 points to number 130.

It’s not all so easy and rosy. Though, World Bank has projected that the Indian economy is expected to grow at 7.5 % in 2015-16, followed by further acceleration to 7.9 % in 2016-17 and 8 % in 2017, however the Dec end review of the economy is indicating that the actual growth would be between 7-7.5 %, weighed down by weak global demand and a poor monsoon. Despite of major reforms steps taken by the Modi Government, there are still challenges (in addition to external factors) which are causing the economy to slowdown. Exports have fell sharply in November for the 12th consecutive month, achieving fiscal target is becoming a challenge, we are losing on divestment front, GST is being stuck, land bill is still contentious etc.

A process of economic reform is essentially crisis-driven and adoption of the reform package is shaped largely by the nature of the crisis itself. India’s current crisis is pertaining to resource creation and management rather than demand management. Hence, most of the reforms introduced by Modi are revolving around faster trade reforms, rationalisation of taxation, public sector disinvestment and restructuring of public expenditure. Public sector disinvestment would raise current revenues besides reducing government liabilities, however as on Dec, there is a shortfall of Rs 50,000 crore in disinvestment against the target for the current fiscal. The government has so far raised only Rs 12,700 crore through PSU disinvestments in the current fiscal. Broadening its base for tax reforms would add to revenue receipts. Swatch Bharat cess is one such initiative. At the other end restructuring of expenditure would reduce the unnecessary consumption liabilities and will improve the fiscal deficit. India's fiscal deficit at the end of November was 87% of the target (owing to expenditure outgo on account of the seventh pay commission, continuing weakness of private investment and less tax collections due to the declining nominal GDP growth) for the entire financial year, which means to stay within the budgeted figure, government will have to do some spending cuts. The fiscal deficit for 2015-16 is budgeted at Rs 5.5 lakh core, or 3.9% of GDP.

Government has also introduced various banking sectors reforms such as recapitalisation of banks, professionalizing managements, bringing Government equity to 52% and allowing greater autonomy to banks and financial institutions. Major steps have also been taken to unearth black money, both domestically and that lying in foreign bank accounts. FDI limits have been raised (and liberalized) in the insurance, defence, railways and the real estate (especially in the key sectors like construction where 50 million houses for poor are to be built). Coal and power sectors have been reformed by introducing a law to facilitate a transparent and non-discretionary method of allocation of coal blocks.

Big task in 2016 for government would be to push these reforms further (especially quick enactment of the bankruptcy code and adoption of GST) and fuel stalled private investment and exports. Infrastructural spending also need to be stepped up along with big push to the manufacturing sector. Make in India week organised by DIPP during 13th-18th Feb 2016 at Mumbai would help in attracting private investments. Next stage of growth can only be achieved through encouraging both public and private investments. On 31st Dec, Modi had a meeting with his team of secretaries where he made them clear that 2016 is going to be an “execution” year to bring about ''breakthroughs'', rather than ''incremental change''. He has asked them to work on innovative ideas spanning across sectors that can be executed in one year, three years and over the long term.

This sounds even more exciting when we read this in conjunction with Modi’s widely used “3-Ds” about India – Democracy (largest democracy), Demography (youngest population) and Demand (1.2bn consumer population) which is so true that it’s not hard to believe that why despite of prospect of rising interest rates in the US and an economic slowdown in China which is causing to uncertainty and a higher risk of economic vulnerability worldwide (less prospect of global growth to touch 4% in 15-16), India is  marching towards 7-7.5 % growth. Research by Harvard University seconds this view, “Indian economy has the potential to be the world’s fastest growing economy over the coming decade, surging ahead of its South Asian economic rival China that will continue to see a slowdown, according to the Harvard University research”. Connecting all these dots, we can see India as “the shining star” in a slowing global economy in 2016.