India’s Recent Reforms Caused Short-term Shocks to System, but Could Realign Economy towards Long-Term, Rule-Based Growth

06 Oct 2017

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· Demonetization, the new Goods and Services Tax and recent banking reforms are among the major economic changes that have generated turbulence and affected growth in India’s economy

· More reforms are likely in the banking sector, including consolidation of public banks

· The changes are designed to create towards greater transparency and long-term macroeconomic stability

· India needs to create roughly 10-12 million jobs each year to meet the needs of its growing population

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New Delhi, India, 6 October 2017 After several years of impressive growth, recent economic indicators, from a slowdown in credit growth to sluggish GDP performance, suggest that India’s economic lustre might have dimmed, at least in the short term.

The recent turbulence has been linked to the government’s demonetization of high-value bank notes, introduction of a major tax overhaul (the Goods and Services Tax, or GST) and reforms in the banking sector. These major changes could improve long-term efficiency and the opportunities for growth.

The government is “shifting India fundamentally to a different kind of economy, a rule-based, trust-based economy,” said Sanjeev Sanyal, Principal Economic Adviser, Department of Economic Affairs, Ministry of Finance of India. Sanyal noted that the government anticipated that its reforms would have unintended, short-term consequences but that the long-term outlook for the economy could be even more promising.

Industry leaders in general agreed that major reforms were needed; however, a number of risks remain.

“Demonetization should have been done differently,” said Sanjiv Bajaj, Managing Director of Bajaj Finserv, India, referring to the “negative mood” that the reforms caused and to lingering questions as to whether it reduced India’s shadow economy. However, Bajaj added that business leaders appreciate the government’s boldness because getting India on course for 9% GDP growth rates could not happen with tiny, incremental reforms.

The effects of tax reform, which was introduced in July, are still taking shape. In the short-term, large and small businesses experienced compliance challenges. However, GST has the potential to consolidate supply chains, improve efficiency and encourage more businesses to operate on a cashless basis. “I think we should go slow … and let GST take its course,” said Adi B. Godrej, Chairman of The Godrej Group, India. Godrej added that he believes the tax will be beneficial for the economy in the long term.

Challenges in the banking sector have made it difficult for companies to access the credit necessary for growth. Sanyal noted that cleaning up balance sheets of public banks – in particular, bad assets related to infrastructure loans – is a much-needed step to improve economic stability. However, the process has posed short-term challenges. And more reforms are likely on the way, including a possible consolidation of the number of public banks.

Despite these obstacles, a number of other signs suggest an optimistic outlook for India’s economic growth. The domestic market has a long way to go before it is saturated with basic consumer goods. Further, a combination of urban planning and infrastructure development could improve land use in India. The construction sector, which has recently contracted, could be a source of future job growth and play a major role in using India’s land more efficiently.

“Unless we make it easier to do business, it’s going to be tough for us to create jobs,” said Shobana Kamineni, President of the Confederation of Indian Industry (CII), India. Business leaders noted that labour reform, largely at the state level, is one way to improve the ease of doing business.

The India Economic Summit is hosted by the World Economic Forum and the Confederation of Indian Industry (CII) – partners for more than three decades – under the theme Creating Indian Narratives on Global Challenges. The summit, taking place in New Delhi on 4-6 October, will welcome more than 650 participants from over 35 countries.

The Co-Chairs of the summit are: Ajay S. Banga, President and Chief Executive Officer, Mastercard, USA; Dipali Goenka, Chief Executive Officer and Joint Managing Director, Welspun India, India; Piyush Goyal, Minister of Railways and Coal of India; Smriti Zubin Irani, Minister of Textiles, Information and Broadcasting of India; Malvika Iyer, Member, Working Group on Youth and Gender Equality, United Nations Inter-Agency Network on Youth Development, New York; Karan Johar, Head, Dharma Productions, India; and Sunil Bharti Mittal, Chairman, Bharti Enterprises, India.

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