India is on the mend, but sustainability and realizing potential will take time
The economic recovery is strengthening with pro-growth economic reforms, acceleration of vaccinations, the waning impact of the second wave, the government and industry being better prepared to face the potential third wave and the industry demonstrating more and more responsiveness to policies. Renewal is also supported by connectivity between policies, as well as sectors.
However, the rebound remains unfair and shows an asymmetric trend in corporate earnings. Despite the persistence of Covid-related challenges, India’s long-term outlook looks bright. The economy is expected to achieve GDP growth of 9.5-10% in FY22. India has overtaken the United States to become the second most sought-after manufacturing destination. Global investment houses are bullish on India despite its high valuations. Businesses in the US, UK, Chile and Japan want India to be the captive hub to bring them digital. Domestic and foreign investors are propelling the market higher, but the rally is quite narrow.
With the economy being large, diverse and fragmented, successful policy implementation will not be easy. It is appreciable that the government has started to correct its misguided policies, such as the repeal of the retrospective law. The Faceless Assessment System (FAS), which failed to start smoothly, was shortlisted for restructuring. The tariff-based political protection afforded to specific industries may not be pursued because it is not competitive. It is globalization, not protectionism, that can make our country competitive.
· The government began to play an activist role in influencing economic direction. Economic reforms are being implemented in virtually all sectors of the economy, although sometimes doubts arise as to their timely implementation. India is not only becoming energy independent, but also a global hub for the production and export of green hydrogen. Green hydrogen could reshape the country’s renewable energy future. The $ 26 billion production incentive (PLI) programs, covering 13 sectors over the next five years, are expected to create global manufacturing champions for an “Aatmanirbhar Bharat”. The privatization and divestment roadmaps are meticulously facilitated.
The Development Finance Institution will soon be operational. The LIC is consolidating. Great impetus is given to the participation of retailers in the LIC. A more important role is attributed to the private sector. The National Monetization Pipeline (NMP) is set up to provide innovative and alternative infrastructure financing. The government has identified Rs 6 billion of existing revenue-generating assets to monetize over four years to fund an ambitious pipeline of new infrastructure. The plan is to attract private investment (national and foreign) in infrastructure by making public matching funds available.
· India is vigorously pursuing technology-driven change. National mission Jal Jeevan adopted cutting edge technology to find cost effective solutions to provide safe tap water to all rural households in the country by 2024. The use of artificial intelligence (AI), machine learning and big data is going mainstream and soon these will creep into all areas.
The evolution of Industry 4.0 has begun, thanks to some visionary companies embracing the promise of a new industrial revolution connecting advanced manufacturing techniques to the Internet of Things. AI and automation are also driving smart manufacturing. Even traditionally very labor-dependent SMEs have started to embrace the technologies, enabling Industry 4.0.
· The RBI recently introduced a Financial Inclusion Index (FI Index), which shows that efforts to improve access to financial services have started to bear fruit. The FI index for the period ended in March 2021 was 53.9, against 43.4 for the period ended in March 2017. Inclusive growth is all the more important in the current context of Covid, with socio-economic inequalities. growing economies. The BRICS countries were urged to expand the scope of the new development bank to include the development of social infrastructure, in addition to the promotion of industry.
· Free Trade Agreements (FTAs) are being reviewed to meet not only international standards but also to promote national interests. A new foreign trade policy benefiting electronic commerce, GIs, district centers, SEZs, R&D, etc. will support FTAs.
In mission mode
· Exports – The government is working on a mission mode to reach $ 400 billion in exports by 2021-2022. Agricultural exports increased at the height of the pandemic. The introduction of a new regime aimed at reducing the tax burden on exporters – Remission of duties and taxes on exported products (RoDTEDP) and textile-focused state and central levies and taxes reimbursement schemes aim to enhance export competitiveness. The industry has also sought a RoDTEP type program for the export of services.
· Industry is policy sensitive. Tatas starts manufacturing semiconductors. TCS, seven IITs and a host of national tech companies are supporting adoption of India’s own version of 5G technology standards. Businesses are tackling the volatile demand environment by rationalizing costs and reducing long-term debt.
· The private sector investment cycle has started to accelerate, pushing India into a virtuous cycle of growth and investment. Electric vehicle (EV) manufacturers have pledged more than Rs 9,000 crore to take advantage of the electric mobility opportunity. The onset of animal spirits – a spontaneous urge for action rather than inaction – is evident.
· Startups received a major boost. Many startups have demonstrated exemplary entrepreneurship, supported by digitization and e-commerce in times of pandemic. Microsoft has partnered with Invest India to support tech startups. Femtech startups are changing women’s healthcare in India. Many start-ups have become unicorns.
· Make-in-India has been redefined. The focus is now on ‘Make in India ‘, and not only ‘Made by India ‘. In a major push towards’Make in India ‘, companies like Apple Inc have made a major shift in their strategies following the government’s PLI program. The Center widely welcomes FDI and REIT for investment and production in the country.
· Agricultural reforms for the betterment of farmers, when implemented, will allow farmers to access foreign markets. For these reforms to be successful, it is essential to establish a synergy between industry and agriculture.
· Job creation takes place in certain skill segments such as IT services, private equity and venture capital firms and digitization. Companies hire professionals with a mix of start-up and consulting experience. As the economy begins to recover and the holiday season draws closer, hiring across industries is on the rise. Most of these jobs are not permanent. Demand comes from the e-commerce, logistics, distribution and healthcare sectors. As AI has become a force for social empowerment, it will replace some existing positions but simultaneously create several new job profiles.
· Unemployment in the informal sector is worrying. The informal sector is more important than the formal sector. A sustainable future for the masses cannot be achieved without converting the informal sector to the formal sector. In the pandemic, the organized sector won at the expense of the less formal. Statistics are often unable to capture the pain experienced by them. Setting up a portal for a database of non-union workers will be helpful.
· The biggest threat to macroeconomic stability is entrenched inflation expectations. Inflation in India may be less transient than in the United States. An analysis of the main drivers of inflation in the United States and India showed that inflation in the United States is more impacted by the unblocking of the economy and therefore transitory. Indian inflation appears to be more structural, which can be difficult to control.
In summary, trade is expected to become an engine of economic growth in India as exports are dynamic. With China becoming an increasingly unreliable trading partner, India can only step in if it implements the right reforms. It is good news that the GST council is considering incorporating fuel taxes into its system. India’s struggling telecommunications sector needs a ‘new telecommunications policy’ 1999–bold reform style.
Emphasis must be placed on energy efficiency, digital solutions and effective policy implementation. By building trust and partnerships between national and local governments and affected communities, lasting solutions can be found. The Center and states should cooperate to implement reforms to the last mile. A trusting government-industry partnership has become a priority, which presupposes an effective institutional mechanism.
Finally, in the face of the global VUCA environment (volatility, uncertainty, complexity and ambiguity), when and how the gradual reduction of quantitative easing of $ 120 billion per month in the United States has become critical. India’s foreign exchange reserves are expected to exceed $ 655 billion by March 2022, and the array of economic reforms already underway puts India in a good position to resist the spillover effect of the probable temper tantrum.
The writer is a business economist