Indian economy is increasingly showing signs of revival

Six months after Prime Minister Narendra Modi was sworn in, there is a sense that the Indian economy has got moving after several wasted years.

There is a sense that the Indian economy is finally taking-off after several wasted years (Photo: Ajay Thakuri) There is a sense that the Indian economy is finally taking-off after several wasted years (Photo: Ajay Thakuri)

It is impossible to not notice the optimism and cheer these days when you speak to any businessman, economist or banker. Whether it is G.M. Rao of GMR Group, Keki Mistry of HDFC, Ajay Banga of MasterCard or Onno Ruhl of the World Bank, everyone agrees on one thing - the worst is over for the Indian economy. And the good times are just around the corner.

"I am very optimistic a turnaround will happen in a big way in the infrastructure sector," says Rao, Group Chairman of infrastructure giant GMR. Mistry, Vice Chairman and CEO of housing finance company HDFC, is also upbeat. "India is in a much sweeter spot today," he says.

Indeed, businessmen have already started talking of expansion plans, new projects, and fresh deals. Ramesh Chauhan, Chairman of packaged drinking water company Bisleri, is so enthused that he plans to put up one plant a month for the next 12 months. Ajay Banga, who apart from being CEO of MasterCard is also Chairman of the US India Business Council (USIBC), talks of $41 billion in investments from the USIBC members coming India's way over the next three years. And infrastructure and capital goods players such as L&T, Punj Lloyd and Lanco have seen their order books swell as fresh orders stream in.

Bankers are getting ready to lend to new projects again. Consumer loans are in demand once again. The stock markets have been scaling fresh highs. And people are talking excitedly about the prospects of an eight per cent GDP growth being just around the corner. And various bodies - from the Organisation for Economic Co-operation and Development (OECD) to the World Bank - have started projecting that GDP growth will pick up sharply.

Six months after Prime Minister Narendra Modi was sworn in, there is a sense that the Indian economy has got moving after several wasted years. At home and abroad, the buzz about India has returned. Economists point to the improving macro-economic indicators - inflation has been reined in, the current account deficit is down, foreign direct investment (FDI) is picking up and foreign institutional money is flowing into the stock and bond markets. And, finally, GDP growth in the last quarter recorded a big jump. The Indian economy expanded by 5.7 per cent to log the highest growth in nine quarters.

Economic outlook
Economic outlook
That is a sea change from just 18 months ago when gloom and doom prevailed, and people, at home and abroad, had nothing good to say about the Indian economy.

Chandrajit Banerjee, Director General of the largest industry body Confederation of Indian Industry (CII), recalls an industry meet late last year in the US where much of the conversation centred around India's 'protectionist attitude'. "We saw a lot of rhetoric on IPR, preferential market access, and a lot of talk on Indians taking up jobs that should have been in the US. There were big billboards against India, a lot of pushback." In contrast, says Banerjee, in October when Prime Minister Modi visited the US, there was a lot of positivity. "There was assurance that if there are impediments, they will be sorted out," he says. Banga says when Modi talked about how a project clearance status can be checked in Gujarat through a mobile app, it impressed everyone.

"Perception has a lot to do with actual business realisation. Perception is very important and at this point there is a swing as far as sentiment and mood is concerned," says Banerjee.

The CII Business Confidence Index, which plunged to its 22-year low last year, turned around in the July-to-September quarter this year to 57.4 from 45.7 in the same quarter last year. "Several companies have expressed intent to invest in India," Banerjee adds. A recent Business Today-C fore Business Confidence survey mirrored those findings. It showed that the business confidence index jumped for the fourth consecutive quarter to reach 60.5 in the July-to-September period, up from 56.8 in the previous three months and 51.4 in the January-March period.

Prime Minister Narendra Modi
Prime Minister Narendra Modi
Everyone is talking about how quickly the Modi government is moving on a host of sectors - from policy reforms to new programmes. And the way he is intent on making things more transparent and easier for businessmen.

"I met Prime Minister Modi at a welcome luncheon in Japan hosted by five business organisations on September 1, and was astonished by his forceful speech. He announced the establishment of a Japan desk at the Prime Minister's Office... Japanese businesses have high expectations from his actions," said Masakazu Kubota, Director General, Keidanren (Japan Business Federation), in an email interview.

Zhiguo Zhu, Senior Vice President of Trina Solar, a Chinese maker of photovoltaic modules, told BT that his company is keen to set up a factory in India and that the country now figures big time in the plan to expand outside China.

He was aware that in the last few years, Chinese players such as Shanghai Electric needed nearly three years to register a company in India and telecom players such as ZTE and Huawei went through several processes and profiling. "This is a matter of the past. Now, under the new regime, we expect things to be faster and more fair."


Most businessmen and economists agree expectations soared when the Bharatiya Janata Party scored a historic win in the Lok Sabha elections, picking up 282 seats on its own. It became the first party since 1984 to have a simple majority of its own in the lower house.

Initially though, the expectations were belied as the government took time to settle down. Finance Minister Arun Jaitley's first budget merely tinkered at the margins. He did not repeal the retrospective taxation law that had been blamed for keeping foreign investment away. Nor did he slash the mammoth subsidy bill.

But since then, policy and programme announcements have come in quick succession. The ambitious 'Make in India' programme was announced first with great fanfare, promising investors rapid response times and all help for new project clearances.

The Supreme Court's decision on coal block cancellations could easily have proved a millstone around the new government's neck. But the immediate announcement that auctions would be held soon, and the ordinance that followed was widely appreciated by even those whose blocks had been cancelled.

Labour reforms were announced for small and medium industries. Self certification of documents by citizens was announced. Announcements of irrigation projects, environmental clearances and others followed. It was not just an announcement a day without follow-ups. Some 40 projects that had been stuck for lack of environmental clearances got the nod. About 181 projects are now getting off the ground.


If you are able to switch a field from a rain-fed field with one crop a year to three crops a year, you are able to drive income, increase food supply.


Minister of State for Finance

Jayant Sinha, the Harvard-educated parliamentarian and Minister of State for Finance, lists out schemes declared by the government which he says are of "extraordinary importance". (Sinha was a member of the Standing Committee on finance at the time he was interviewed for this story).

The Pradhan Mantri Gram Sinchai Yojana seeks to take irrigation water to each and every field in the country. It includes a soil health card for farmers that will have information on the status and production capability of the soil.

"If you are able to switch a field from a rain-fed field with one crop a year to three crops a year, you are able to drive income, increase food supply. We could double our agriculture productivity," says Sinha, son of Yashwant Sinha, finance minister in the Atal Bihari Vajpayee-led National Democratic Alliance government from 1998 to 2002.


Economists also point out that the Modi government has been extraordinarily lucky in some ways. The plunge in crude oil prices, from $110 a barrel when he took over to $80 now, helped the Modi government cut its import bill and allowed it to de-control diesel prices, which would otherwise have been difficult.

"Inflation is coming down. The commodity prices world over are down. Oil, which was once predicted to be $180 [a barrel] by research firms, is now at $80 levels. Lower oil prices will help in further reduction of the current account deficit," says Mistry of HDFC, who expects interest rates to fall in the next 12 months.

Reserve Bank of India Governor Raghuram Rajan's decision to keep interest rates high has played a major role in cooling inflation, and that is aiding the Modi government. The improvement in the US economy is having rub-off effects. The fact that the other BRIC (Brazil, Russia and China) countries are seeing a slowdown or deteriorating performance has also helped India look all that more attractive to foreign investors.

In that sense, it is also true that the Manmohan Singh-led United Progressive Alliance (UPA) was unlucky as it had to deal with a global financial crisis and then rising commodity prices, though its policy paralysis and mis-governance were equally responsible for the sharp decrease in GDP growth.


What experts are still divided on is whether the Modi government's economic thought represents a clean break from the past - or is merely evolutionary, with the odd big changes thrown in.

The mood in Yojana Bhawan, which houses the Planning Commission that had been created by India's first Prime Minister Jawaharlal Nehru to guide the nation's economic destiny, is pretty dismal. A year ago, it was one of the few power centres of New Delhi under the UPA government. Chief ministers of states needed to pay their respects to the mandarins at the Planning Commission to get their share of largesse.

But after taking charge as Prime Minister, Modi announced dismantling the commission. He did not make it clear what he was replacing it with. But he did indicate he was overturning the current model of centre-state relationships. The commission was the symbol of an all-powerful Centre allocating scarce resources to supplicant states. The Modi model is more about an evolved federalism.

Then, the announcements that the government wanted to repeal 287 outdated laws hindering business in double-quick time, and the willingness to relook at the labour laws - considered sacrosanct till a few months ago - gives a boost to the theory that Modi is willing to change everything that have defined India's economic policy making till date.

And yet, senior economists point out that Modi is also faithfully adhering to the UPA government's economic thinking in many ways.

The Congress itself has had major twists and turns in its development and economics ideology over the years. The first government of independent India led by Nehru was committed to long-term planning, based loosely on the Soviet model. It envisaged the public sector as taking care of the heavy industrial needs of the country. At the same time, it was not inimical to private enterprise - and private businesses thrived in a variety of sectors.

During the Indira Gandhi years, government control became stifling. Nationalisation of a host of sectors - from banks to coal mines to airlines - brought private enterprise to its knees. The licence raj became extreme, and exorbitant taxes virtually killed all new private enterprise. The draconian labour laws added to the problems.

Under the Rajiv Gandhi government, unshackling of the licence raj was initiated but many policies it followed (and those followed by its successor, the VP Singh-led government), brought the country to the brink of bankruptcy. It was left to PV Narasimha Rao, prime minister from 1991 to 1996, and his finance minister, Manmohan Singh, to liberalise the economy.

The Vajpayee government accelerated the reforms initiated by Rao. It pushed ahead with disinvestment and ushered in India's telecom revolution.

The two UPA governments led by Manmohan Singh tried to push through reforms while also increasing subsidy in a host of sectors - a throwback to the socialist policies followed by earlier Congress governments.

Now, the Modi government is making drastic changes in some areas - like abolishing the Planning Commission - while also faithfully carrying forward the UPA government's reform ideas in areas like FDI in defence and insurance. It has also adopted some socialist schemes of its predecessor - like the food security bill, and the direct transfer of subsidies using Aadhar, a unique identification number given to all citizens. Clearly, Modi is changing what seems to be broken, while retaining and finetuning policies that he considers sensible, even if they were initiated by his predecessor governments.

"Free enterprise should be encouraged. Their (Modi-led government's) economic thinking is free-enterprise oriented... This government is opening up FDI in real estate. Swacch Bharat is a brilliant campaign - he [Modi] is very development oriented," says Adi Godrej, Chairman, Godrej Group.

However, Ashok Desai, who worked closely with Manmohan Singh on the 1991 reforms, says this government, like the last one, does not have any economic models. "All the Leftists were shocked that we were doing this (reforms) and that the International Monetary Fund and World Bank had forced us to open the economy. The Rightists didn't think much of Manmohan Singh, he had worked in the government for 20 years and had shown no leaning towards liberalism. Economies are not driven by models, they are driven into models," says Desai.

The fact is that the Modi government inherited a broken economy and fixing it was not the easiest of tasks. The UPA had to deal with several problems, and governance too had been compromised with massive corruption scandals.

It also brought out the ugly face of what Harvard Professor Lant Pritchett describes as a "deal economy" - the nexus between politicians, bureaucrats and business - as opposed to "rule economics". Rule economies are those where one can predict the outcome on the basis of rules. Deal economy is dependent on the deal or the relationship one has with the economy or policy makers.

Pritchett calls India a flailing state that is trying to transition from deal economics to rule economics. "My diagnosis is that India is a flailing state because it is very much a deal economy. No investor comes in saying I don't worry about the politics of the state. In a deals economy there is no underlying rules protection," says Pritchett. "...In the last two years of the Congress rule, the certainty of the deals environment disappeared. There were no obvious centres of power that they will make a deal - and stand by the deal."

If the Modi-led government tries to turn into a rules economy overnight, there could be a serious economic backlash. "These things don't happen overnight. In the short run, I am super-optimistic that Modi can provide good deals. India is a really attractive country to do business in. In the long run, India will have to move towards a rule-based economy. Investors crowd in and crowd out depending on the signals in a deal economy," he adds.

But Modi is taking all the right steps, says Surjit Bhalla, Managing Director of Oxus Research and Investments. He says that the previous UPA government took some negative measures. Modi is undoing that damage and taking positive steps such as freeing up of oil prices. The Modi government also seems to be serious about bringing in long-term reform in agriculture, says Bhalla. Modi is also focusing on infrastructure, point out both Godrej and Mistry. For instance, smart cities and other similar projects are likely to give a big fillip to housing, they say.


Most experts agree on one issue though. The government has made the right start, but it will be a while before its policy announcements bear fruit and the country returns to its 8 per cent growth trajectory. Equally important, while some steps have been initiated, they now need to be followed up with detailing and policy implementation. And because of the enormous expectations, there is every chance that disillusionment can set in if things do not move fast enough.

Rajiv Kumar, Senior Fellow, Centre for Policy Research, points out that while the coal ordinance was a good, quick step, he would have been happier if the government had thought things out before the announcement. "The government could have taken more time and come out with a more detailed policy. The government ought to denationalise Coal India," he said.

"There is so much hope and excitement. Prime Minister Modi needs to show this excitement is warranted. Every government has a honeymoon period, but people's memories are short," cautions Michael Cohen, President of the Michael Cohen Group, a research firm.

But Cohen is optimistic nonetheless. "Modi seems to have embarked on a policy with little successes that can lay the foundation on which bigger things can get built... You have a man with a proven track record who wants to stimulate the economy," he points out.

In fact, almost all the measures announced are likely to impact the real economy in the medium term. The 'Make in India' campaign has identified 16-17 sectors, in which four sectors - defence, railways, space and electronic components - can attract additional investments.

Some of these though have high strategic value even if their economic multiplier effect is relatively low compared to other sectors. Take defence production or bullet trains or even space technology, for instance. They are all capital intensive and showcase technology prowess, but they do not create many jobs or show quick trickle-down effects. Onno Ruhl, Country Director, World Bank, for instance, talks about the Mars Mission as an important accomplishment that projected India as a nation that can do something that many others have failed in.

Ruhl points out that all reforms need not be painful, as was the opinion of the previous government. "I think in India there is a tendency to overestimate how unattractive reforms are from an electoral standpoint. Not all reforms are actually difficult," says Ruhl.

The other sectors the government is focusing on - such as electronic components - will have long-term benefits on jobs. Creating jobs is important as India stares at an impending crisis if it does not realign its model towards generating employment and skilling its workforce. While skilling and jobs seems to be at the heart of Modi's Agenda, creating 30,000 jobs a day is a daunting task. "The renaissance has to be real empowerment of people, by expanding opportunities of productive employment. There is no point in being a growth wala or a poverty wala [UPA]. You can be both by being an employment wala," says Rajiv Kumar.



We won't mind looking at a few exceptions that can be added to the land acquisition bill. It should not become a yoke around the neck. We are willing to look at it.


Commerce Minister

Ajit Ranade, Chief Economic Advisor, Aditya Birla Group, says that if the government follows through on its measures, the investment cycle will pick up again. Ranade and many other economists feel GDP growth can reach 8 per cent in 18-24 months from now. The thrust on increasing manufacturing's share to 25 per cent of GDP, could increase India's overall capital-output ratio, which at 4:1 is among the lowest in the world. China's capital output ratio is 7:1.

Nirmala Sitharaman, Minister of State for Commerce, Industry and Finance, says the government is ready to change laws if they stand in the way of business. From the Land Acquisition law to the Companies Act, she says the government is willing to tweak them if they prove business unfriendly. "We won't mind looking at a few exceptions that can be added to the land acquisition bill. It should not become a yoke around the neck. We are willing to look at it," she says. The sentiment was also expressed by Finance Minister Jaitley recently.

The commerce ministry is taking a re-look at the free trade agreements India has with several countries to understand which pacts have benefited local traders. Special Economic Zones are being reassessed for their competitiveness and efficiency, and so are more than 1,000 laws that seem to hinder industry.

On the ground, the government still has to keep its promise of bringing 'acche din'. The world is watching if Modi, who has managed to convince investors from across the world about his track record in Gujarat, will deliver. This perhaps is India's biggest opportunity in recent times to once again take centre stage and emerge as a force to reckon with. Hopefully, the Indian lion is ready to roar.

Modi government's report card
Modi government's report card

(With inputs from Anand Adhikari, Venkatesha Babu and Anilesh S. Mahajan; Research inputs by Jyotindra Dubey)