Daily Editorial Update – Economic reforms: Wish upon a rising ‘STAR’

India’s reforms outlook can be
looked at by dividing the reforms agenda in four separate categories. These are
not reforms by themselves, but the desired outcome of the various reforms that
are being pursued at present. The reforms objective is to transform India into
a STAR — Simple, Transparent, Affluent, Resilient — economy.

Simple: In the last three years, the authorities have tried to
simplify rules and regulations, so as to improve the ease-of-doing-business
conditions in the country. The efforts have started bearing fruit slowly, with
India’s current ranking having improved to 130 from 142 in 2014.

It can be expected that the
government will remain focused on measures that will help to improve the
ranking substantially and persistently in the period ahead. Implementation of
the goods and services tax (GST) from July will simplify the indirect tax
structure, reduce geographical fragmentation and broaden the tax base, which
will prove to be transformational for the Indian economy in the medium term.

The other area where India has
made significant progress is in the foreign direct investment (FDI) space.
Here, norms have been liberalised and simplified substantially since 2014. It
can be expected that reforms in the FDI space will continue.

This, along with the focus on
improving ease of doing business and GST implementation, should help sustain
the positive momentum in the period ahead.

Transparent: The authorities have taken a number of steps in the
last few years to improve transparency. Moving to a fair and transparent method
of e-auctioning of national resources has been a welcome and bold step.

Deregulation of petrol and diesel
prices, and linking them to global oil price movement, has helped to eliminate
discretion and distortion. Implementation of the bankruptcy code will help
empower banks and usher transparency in the banking sector lending process.

And the recent move to demonetise
high-value currency is also primarily directed toward increasing transparency
in the economy. One can expect tax compliance to improve from the next year due
to the demonetisation move. While the cash economy may still remain prevalent
in the country, the increased pace of digitisation will help reduce the share
of cash economy on the margin as compared to that in the pre-demonetisation
period.

Affluent: India’s urbanisation rate increased by only 3 percentage
points from 28% in 2001to 31% in 2011. However, the government’s commitment to
expedite the pace of urbanisation as a key medium-term objective is
encouraging.

It is empirically true that by
and large, the most economically affluent countries are also highly urbanised.

While urbanisation may not be the
only factor that makes a country rich, it is undeniably one of the key
catalysts that help propel an economy to a higher growth trajectory. Take
China. Its emergence as an economic superpower has occurred hand in hand with
rapid urbanisation. About 57% of China’s population are urbanised today,
compared to only 20% in the late-1970s.

The government’s Smart Cities
initiative should get a boost in the next two years. This will help accelerate
employment and infrastructure in the economy.

Resilient: Since the 2013 currency crisis in India, steps have been
taken by both the government and the Reserve Bank of India (RBI) to make the
economy more resilient from both domestic and external shocks.

Foreign exchange reserves have
increased substantially in the last three years. Along with the central bank’s
focus to maintain positive real interest in the economy by keeping inflation
low, this growth in forex has helped maintain stability in the exchange rate, a
key source of comfort for investors.

Indeed, even with global
uncertainty on the rise, India is currently regarded as a relatively safe
investment destination compared to other emerging market peers. The
government’s decision to stick to the fiscal consolidation agenda, despite
numerous competing challenges, is also encouraging.

It also helps complement the
RBI’s objective of preserving the hard-earned macro stability since mid-2013.
The continuation of prudent fiscal and monetary stance should improve the
medium-term growth narrative for India.

The overall macro outlook of the
Indian economy looks positive. India has embarked on a journey to transform
itself into a STAR — simple, transparent, affluent and resilient —economy, and
the progress so far has been impressive.

Despite what has been achieved in
the last few years, there is scope for incremental improvement, both in terms
of India’s own potential and also in comparison to other emerging market peers.

One hopes the authorities push
harder in the coming years to ensure that most of the medium-term objectives
are met.

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