Reforms stand India in good stead in Indian economy: IIFL Capital Services

8 Jun 2023 , 10:29 AM

The cumulative impact of a number of policy initiatives by the Modi government over the last 9yrs has been to enhance India’s capacity to sustainably grow at 6-7% p.a. in the coming decade. India’s macro-economic stability is reassuring despite upheavals like Covid, aggressive monetary tightening by DMs and Ukraine war. India’s banking system is robust, inflation and external account in check, FDI flows strong, fiscal position getting better. Debt/GDP ratio is relatively low, core infrastructure is seeing accelerated improvement and capital productivity is on an uptrend. Favourable demographics, coupled with better financial inclusion, a potential rise in share of manufacturing and the rapid growth in digital infrastructure are other big tailwinds. All-in-all, reforms have accelerated to a scorching pace and India should be the third largest economy in the world by 2030, approaching USD6.5trn GDP by then.

• Sustained focus on building physical, financial, technological / digital and administrative capacity through a “reform, perform and transform” mantra is all set to pay dividends.
• Capital adequacy and profitability of banks being at a multi-yr high, emergence of larger PSU banks (aided by consolidation / mergers), faster resolution of bad loans due to Insolvency & Bankruptcy code and recent creation of NARCL (bad bank), have all enabled significantly lower asset quality stress — credit growth in the coming decade will be much higher than the past one. As is well known, higher credit growth has a significant multiplier effect on GDP growth. Central Govt. spends on roads as % of GDP has nearly tripled over the past decade. Power capacity has more than doubled and Port and Airport infrastructure has gotten significantly better. National Infrastructure Pipeline (NIP), the roll out of which is currently underway, envisages an investment of USD1.4trn by FY25. This will aid crucially in reduction of supply-side bottlenecks.
• Reduction of Corporate tax to 25%, stabilisation of GST (corp & indirect tax to GDP% total has actually risen slightly), introduction of production-linked incentives across a number of Manufacturing sectors, raising FDI limits in a number of sectors including Defence, rising indigenisation in sectors like Railways, Labor reforms through simplified regulations across 4 codes (work in progress), streamlined processes in auction of mines, under-levered corporate balance sheets have — all created an enabling environment for sustaining higher Manufacturing and Services growth. Over the past decade, FDI flows at USD600bn were almost 2x the previous decade.
• Introduction of Real Estate (Regulation & Development) Act and simplification of rules on REITs has had a transformational effect on Real Estate sector. Real estate, a key driver for growth in countries like China, was actually a drag in India up until the recent changes. Other growth enablers include ongoing thrust on affordable housing and setting up of an investment fund for reviving stalled housing projects. Faster growth in Real Estate will be another factor to drive a multiplicative effect on GDP growth.
• Ushering in the Monetary Policy Committee (MPC) for better management of inflation is also playing out well. India’s fiscal excesses, esp. through the Covid phase, were much lower vs most other large economies. Rather, India’s fiscal situation is actually getting better and will further improve as tax-GDP ratios rise. Quality of government spend is improving due to higher share of capex (17.4% in FY23, budgeted at 22% in FY24 vs 12% in FY14). Inflation stability (targeted range of 4-6%) is critical for sustaining growth.
• On the digital side, transformational initiatives through financial inclusion, rising share of direct benefit transfers, rapid adoption of UPI, buoyant capital markets and growing share of formal financial savings, esp. through Mutual Funds & Insurance channels, and healthy external account — are all emerging as other productivity improvement and growth enablers. SME borrowing rates have come off sharply thanks to information richness (GST, CRILC).
• Over the next 5-10 years, India will still need to invest a lot more in social and urban infrastructure, simplify tax laws, re-introduce Farm laws to improve agricultural productivity, address issuance of SEB (state electricity boards) losses, enhance Power gen capacities, among others, to fully capitalise as well as enhance growth potential.