‘Winds of Change’: Moving in the right direction

(By Rana Kapoor, MD & CEO, YES BANK Limited)
The Indian economy has withstood the litmus test. The growth recuperation visible in high frequency indicators confirm that currency exchange induced disruption was at best short-lived; with a swift pace of re-monetization restoring economic normalcy faster than earlier anticipated. 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, de-regulation and digitization, India can be expected to maintain its position as the fastest growing world economy in the coming years; amidst a global economic backdrop that still remains weak and fraught with uncertainty.

This growth resilience of the Indian economy has taken shape over the last 2-3 years, owing to the 5 new winds of change, which will continue to play a latent, but potent role in the coming years:

One - there is a perceptible feeling of Action and Outcome Orientation in Government policies. As such, economic reforms are now better targeted such as the MSME for Make in India, Affordable Housing for Job Creation, MNREGS for Rural Infrastructure, amongst others.

Two - policy delivery has been chiseled with usage of smarter technologies such as JAM Trinity (Jan Dhan – Aadhar – Mobile) to improve allocation of resources while minimizing exclusion errors and leakages.

Three - there is a very Proactive Policy for International Collaboration, moving beyond diplomacy for enhancing trade and commercial linkages with other countries.

Four - Government has been focusing on Building Consensus on critical policies with key political parties. The passage of GST with full majority by the Rajya Sabha is an excellent example.

Five - there is a growing implementation of Competitive Federalism, which via Ease of Doing Business is bringing out the best practices and policies by most State Governments. Investment summits and road shows by State Governments are now gaining traction.

These winds of change along with India’s structural strengths of a young demography, high technical and engineering skills, large consumer base among others, have in my opinion now placed India on a pre-ordained growth trajectory. The sustainability of this growth story have been further supported by factors of –
o India’s improved macro-economic stability reflected in low inflation, low CAD and fiscal prudence as reinforced in Budget FY18
o Governance regime that has leaned away from unaffordable populism and cronyism
o Variegated reform mix with focus on micro enablers, macro stability, institution building, and behavioral shifts
o Long term focus on growth via programs of Smart Cities, Make in India, Start-up India, Digital India

At the cusp of a new fiscal year, 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 -

Reset in public sector remuneration
o The central government had 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)
o This will benefit 4.7 mn central government employees (including defence and railways) and 5.3 mn pensioners. Total outgo for Centre (including Railways) has been estimated around Rs 85000 cr
o 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
o Between Jan-15 an 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
o Over FY17 and FY18, budgetary allocation for capital expenditure is slated to grow by 11%.
o Total allocation for infrastructure development is budgeted at Rs 3.96 lakh cr for FY18
o Rs 2.41 lakh cr spending on transportation sector in FY18 is likely to spur economic activity across country and create job opportunities
o 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.

Deleveraging push to Buy vs. Build
FY17 saw initiation of deleveraging seen in some sectors driven by asset sales. This is expected to gain further traction in FY18
o Significant increase in M&A activity involving domestic assets of non-financial companies with deals amounting to Rs 1.4 lakh cr in 2016 as compared to Rs 0.5 lakh cr in 2015
o Substantial asset sales undertaken by power sector followed by steel with acquisitions done by both domestic and foreign entities
o Weakest links have started to taper with share of debt of weak companies* (% of total debt) declining to 14.5% as of Sep-16 as compared to 25% in Sep-15. Additionally, the proportion of weak companies* (% of total companies) has decline to 13.5% as of Sep-16 as compared to 15.3% in Sep-15
* Weak companies defined as Interest coverage ratio of less than 1

Conclusion

The support from domestic enablers accompanied by inception of GST in the coming months and wider implementation of Insolvency and Bankruptcy Code are expected to enhance productivity gains for the economy and boost short - medium term growth potential. The ‘economic winds’ for the Indian economy have indeed changed favorably. The next 1-2 years will now witness these winds gather velocity to push India onto a higher growth stratosphere.

Date: 
Thursday, June 15, 2017