2020 will remain etched forever in all our memories as a landmark, for good reasons and bad. Never had we before experienced something as life-altering as the events of the last year. It has been a challenging year for everyone, especially India where the vast population and comparatively limited medical infra meant that any pandemic had the potential to hurt the nation’s entire core.
However, India’s approach to the pandemic, while contrarian to many global economies, has been vindicated in the second wave emanating in the western countries while India continues to reduce the daily active case count. This amazing resilience of our masses has been matched by the resilience in our economy which has rebounded sharply from a complete lockdown to ever-improving growth estimates every quarter. With a clear bounce-back that exceeded expectations, India continues to surprise on the upside.
India: At an Inflection Point
India has always been a self-correcting economy, rebounding quickly after lows but also witnessing periods of consolidation after over-heated growth. However, the last few years have been slightly different. There have been three downcycles playing out in India over the last few years. The long term downcycle started about eight-nine years back due to the emerging scams, rising NPAs, overcapacity in the economy and the taper tantrum to name a few. The medium-term downcycle emerged three-four years back with issues like ILFS and the liquidity squeeze and the near-term downcycle was precipitated by the pandemic.
The interesting part is that all three downtrends are now reversing at the same time. Liquidity concerns have gone away, demand has been coming back, NPA clean-up is being actively undertaken and efficiency is reaching its peak, partly driven by the pandemic-induced digitization drive. Basically, all three downtrends are reversing at the same time and the cumulative force is huge.
So while we saw limited capital expenditure over the last eight-ten years, the current demand growth will mean that companies across sectors will invest heavily in growth. Be it auto, manufacturing, commodities, real estate, infrastructure, cement, amongst others, we are seeing some great quarterly financial results and also the plans for investment in the near future. In a way, we are now in a phase of a structural upturn, which could last for a few more years.
At the same time, the structural reforms taken over the years, be it Rera, IBC, GST amongst others will now provide a further tailwind to this economic appreciation. We are at an inflection point in our economic journey, like 1992. It is imperative now that the government uses this year’s budget to help leap start across this intermediate point and work towards creating a more enabling ecosystem to truly establish this new economic dawn for India.
1. Enhance spending with limited fiscal restrictions in the short-term: Government spending has been measured and careful even after COVID unlike the fiscal excesses of many other regimes across the world. This has played out well as the economy has rebounded sharply due to its natural resilience. It is now time to drive this momentum further with a stronger fiscal push.
Government spending can be viewed in two ways — One is the Government investing money and the other is the Government putting cash in the hands of the Aam Aadmi (common man). The more important one in the current scenario is the Government putting cash in the hands of the people by cutting taxes so that the economic momentum continues.
The government should keep the fiscal deficit concerns away for the short-term. At the same time, they must ensure that they are able to pull it back after 1-2 years. In 2009, when they did that, they were not able to pull it back and it continued till 2012 and that resulted in a huge spike in inflation. Therefore, a careful and concerted fiscal easing plan which can be gradually pulled back is the need of the hour.
2. Incentivise investment: With the economy on an upswing, the government needs to ensure timely support to encourage investments, both domestic and foreign. The overhang around the clarity on taxation regimes must be removed to provide comfort to investors. Enhancing FDI limits in key sectors could help further the flow of global capital. Similarly, it is important to further focus on our administrative processes. The administrative bottlenecks and overall complexity continue to act as deterrents for investors. As a nation, it is an opportune time that we move away from an approval-oriented economy to a market-oriented economy if we need to make this opportunity work for us.
3. Structural reforms: The last few years have seen a bevy of structural reforms in the country, reforms which will create a positive, long-lasting impact for decades to come. Some areas have been addressed while some continue to await further movement. Reforms around labour laws, improving the credit markets and the capital markets are amongst others important requirements for the current environment. At the same time, it is imperative that these reforms ensure a more uniform and equitable benefit for most of the stakeholders. It is important that the budget continues to focus on this reformist vein and drive similar significant changes as in the last 5 years.
4. Privatisation and disinvestment: The significant spending on the fiscal side will need some offsetting with higher revenue. While higher tax collections will eventually emerge because of the higher economic growth, an operationally sound privatisation and divestment initiative will help absorb the impact in the next 2-3 years. The timing could not be better with ample global liquidity and low interest rates. There is strong appetite for good quality assets. Many public sector enterprises have a lot of potential which can be maximised with possible partnerships between the government and the private sector. I think the Government should announce a disinvestment target till 2024 and embark on a 4-5 year plan to raise Rs10-15 lakh crore, through privatisation.
Dawn of a New Era
India has been a mystery to many, with its self-correcting nature, the frequent swings to the extremes and the subsequent reversion to mean, the ability to bounce back quickly and decisively, the strength to face devastating events and yet show unmatched resilience, the inherent strength of its demographics and its ability to thrive in unfavourable global circumstances. Yet, we face our own set of challenges, be it the on-going issues around the Farm Laws, the geo-political challenges or the continued inequality. A thriving economy whose benefits percolate to the masses can be a panacea to all our problems. Not only will it create more equitable and inclusive society, it will also further strengthen our hand as a decisive player in the modern global era. History, like often does, has accorded a great opportunity to us and it is imperative that we clasp this opportunity to shape a new India of the future.
Rashesh Shah, is chairman at Edelweiss Group. Views expressed are his own and do not reflect the newspaper’s policy.
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