It all adds up!

Reforms: Incremental actions so far, yet huge compounding effects seen in coming months

It is a story that is less sensational, but more sensible. Less sensational, because it is devoid of any big bang actions. For headline hungry media, it is a boring one that hardly merits their attention. For them, slow progress in headline-catchy reforms such as GST and land bill means no progress at all. Sometimes, series of small steps diligently done day after day, far away from the glitzy media glare, can add up to much larger structural changes over time just by the sheer compounding effect. This Govt’s policy regime seems to suggest such a story-line.

First, for the incremental steps that can become giant leaps, here we go;

  • Crop Insurance & Irrigation
  • JAM initiative ; Jan Dhan bank a/c , Aadhaar and Mobile governance
  • Targeted subsidy (DBT) and Long-term fiscal health
  • New Bankruptcy Code
  • Easing Agri marketing ( Online retailing and slow dismantling of APMC)
  • FDI reforms in Insurance , Defence and multiple sectors
  • Deregulation of Diesel
  • Real Estate bill
  • Waterways bill

Some of these are real game changers which have the potential to propel India into a structurally higher orbit of economic growth. Of course, all these steps are in the early stage of implementation. Larger impacts would come much later. But there are some early pointers that can give a sense of where we are headed. FDI profile is one such lead indicator that can provide early cues. India’s FDI profile is seeing a quantum leap and probably reflects the changing prognosis of global investors about India’s structural story.

India’s inward FDI flows have seen a dramatic surge in CY15. For the first time ever, India outstripped China as the top destination for FDI announcements in CY15. According to fDi Intelligence (division of Financial Times), India attracted $63Bn of FDI projects against $56.6Bn for China. The report said the biggest change in global green field FDI in 2015 was the near tripling of FDI projects into India. While much of this is into e-commerce/IT, infra & manufacturing are not far behind. While India is yet to move beyond assembling units in FDI value chain, one can spot encouraging early signs that some of these projects are into large scale real manufacturing.

Coming back to incremental policy actions, with political capital improving for current Govt. post the state elections, the pace of policy actions might accelerate in the coming months, giving further fillip to the overall India macro story. GST could be the next reform agenda that could see more traction, though Govt. might dither on it fearing inflationary impact closer to the general elections. One hopes not.

This does not mean everything is rosy for India. The private capex engine is still sputtering and unlikely to fire anytime soon, given the stressed corporate balance sheets and NPA straddled banks. Without turn in private investment demand, it is near impossible to put the economy above 8%+ growth. Given such a criticality, one would have expected  the Govt.  to deal with the bad loan problems much more forcibly than it has done so far. This is certainly one area where the policy actions were much less proactive and left much wanting. This could be one of the reasons for FM’s poor approval ratings in the poll surveys.

Overall, India’s economic landscape will look structurally a lot different in 3 to 5 years, if the incremental reforms that have been unleashed by the current administration gather pace and momentum in the coming months. Interesting times ahead!

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