Economic reforms will bear fruit in 2018–CEO Yes Bank–09.01.2018—–*****

2018 will be the year when the three structural reforms of 2017—bank recapitalisation, insolvency resolution and the goods and services tax (GST)—will bear fruit. For the first time since 2012, India’s growth recovery could be truly broadbased, supported by the twin engines of consumption growth and a reviving capex cycle. The capex cycle should be rumbling back to life, supported by gradual de-leveraging of corporate balance sheets and a banking system geared to support rising credit penetration in the economy. The private sector, which has been in a wait-and-watch mode, should start doing its share of heavy lifting.

The implementation of the Insolvency and Bankruptcy Code (IBC) has drastically cut down the time taken for insolvency resolution. To further hasten this process, RBI has been empowered to initiate the insolvency resolution process in case of a default. The PSU bank recapitalisation plan worth Rs 2.1trillion was a masterstroke.

It addressed the capital needs of PSU banks while putting to rest any fear of any adverse impact on fiscal deficit through the usage of recapitalisation bonds. This will be a pivotal step to get the credit channels flowing as PSU banks account for 67% share of credit to industries.

While it’s still early days, we are already seeing benefits of GST with the expansion of the indirect tax base and removal of inter-state checkposts resulting in faster movement of goods across state borders. GST should be the keystone on which GoI’s aim of expanding the formal economy will be built—incentivising all economic agents at every stage of the product chain, right from procurement of raw materials to the sale of finished product in order to be tax-compliant.

The task of unlocking the full growth potential of the economy, however, has just begun. A low hanging fruit would be the stock of stalled investment projects (private and public sector) worth `13.2 trillion (as of Q2FY18). The key reasons hampering project execution are fuel and raw material supply issues, lack of environmental clearance, and of funds.

All of which don’t require ‘big bang’ reforms, but continued incremental ones that could unlock incremental growth potential up to 2%. GoI, on its part, has been trying to improve project implementation, which is getting reflected in significant reduction in cost overruns of central projects from 20% of the original cost in FY15 to 11% currently. Reforms this year will have to be built on the structural reforms undertaken in 2017 and make growth more inclusive. The key reform pillars will have to be rural economy, infrastructure, social security and employment.

With 66% of the population residing in rural areas, shoring up rural incomes will go a long way in spreading the fruits of growth. GoI has made doubling farm incomes by 2022 a target. To achieve this will require a multi-pronged approach: improving crop productivity, increasing coverage of irrigation, encouraging movement of people towards more productive non-farm sectors, and improving the terms of trade for farmers.

GoI’s commitment to boost investment is apparent with the Centre’s capital expenditure growing at a robust 30% in the first seven months of the current fiscal year. Its focus on infrastructure over the last few years has already borne fruit in sectors such as power, where targets for transmission line addition are being exceeded consistently.

The road sector has also been a success story. GoI’s support will continue under the Bharatmala project, under which 34,800km of roads are to be constructed, and `5,350 billion invested over the next five years. Building an effective road network will enable the full benefits of a unified market created by GST to flow through, as 60% of freight transportation is handled by roads.

Around 92% of India’s workforce is in the informal sector. GoI is addressing this through the Atal Pension Yojana and expanding the insurance net through the Pradhan Mantri Suraksha Bima Yojana and the Jyoti Jeevan Yojana. A strong social safety net will not only ensure better living standards, but will also reduce the need for precautionary saving, providing a boost to growth via higher consumption expenditure.

The importance of generating enough jobs will be critical for gainfully absorbing an additional 12 million people each year to the workforce over the next 10 years. The labour-intensive MSME sector will play a crucial role, and should be supported by additional measures to increase investment levels and profitability. Policy focus should be on sectors that have greater employment generation capacity such as construction, textiles, furniture manufacturing and leather products. If the India economy managed to be one of the few bright spots in the world last year, here’s hoping it’ll be a beacon by the end of this one.

(The writer is CEO, Yes Bank. Views are personal)

via Economic reforms will bear fruit in 2018

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