The worst is behind us

Year 2014 is likely to be remembered as a Kairotic moment or turning point in India’s post-crisis economic landscape. If 2013 saw the amplification of challenges for the economy, 2014 saw the attenuation of those challenges.

The biggest factor contributing to this change was the decisive outcome in the general elections. India conducted the world’s largest election with a highest-ever voter turnout of 66.38 per cent, bringing a single party majority in the Lok Sabha for the first time in three decades.

This political stability ushered in hope for better economic prospects as it meant an end to the coalition compulsions that had derailed critical policy and legislative decisions over the past few years. While there have been no big bang moves, government’s efforts so far have been progressive and pragmatic. This is in consonance with the efforts of the Reserve Bank to improve India’s growth-inflation mix.  

Owing to these factors, India has re-emerged as an attractive destination for foreign capital. So far in 2014, India has received more than $42 billion of foreign flows with the rupee being relatively stable in comparison to its emerging market counterparts despite a resurgent US dollar.

The Government’s measures at reining in food inflation and RBI’s anti-inflationary stance have led to the structural drivers of inflation receding quite rapidly into the background.

The providential decline in global commodity prices, especially oil, have aided efforts at improving growth prospects. Oil prices have seen a dramatic decline of over 45 per cent over last five months significantly altering the risk matrix for India.

Not only has the correction in commodity prices hastened the pace of decline in inflation, it has improved external sector dynamics, provided much needed succour on the fiscal front (read fuel subsidies which are India’s Achilles’ heel) while creating space for monetary easing.

At the cusp of a new economic cycle, India needs to usher 2015 with an accelerated policy push towards structural reforms in factors of production like land, labour capital and enterprise.

For growth to acquire a structural and sustainable character, the following measures steps should be taken: realistic Budget arithmetic; quick resolution of issues pertaining to land acquisition; a policy for fair and transparent allocation of natural resources; and swift Parliamentary consensus on passing critical pending Bills.

This will amplify the economic benefits of a favourable commodity cycle and easing interest rate environment. These developments should help the Indian banking sector, which is burdened by rising stressed assets, especially in infrastructure.

Recent policy initiatives (to debottleneck projects stuck for want of approvals) along with RBI’s efforts (to provide banks the flexibility to restructure infrastructure loans and incentivise raising long term funds) should allow for some repair of banks’ balance sheets.

This, amid proposed phased reduction in government stake in banks to 52 per cent, would be positive for the undercapitalised public sector banks, enabling them to better respond to the credit needs of a growing economy.

The recently launched flagship initiative, the Pradhan Mantri Jan Dhan Scheme, aims to create a platform for universal access to banking facilities for the unbanked, which could prove to be a game changer for India’s financial landscape.

Likewise, government’s emphasis on digitisation of financial services and the emergence of new age “mobile banking” are expected to open up new avenues in the outreach of the banking sector in India. A combination of these demand-supply dynamics are likely to place India’s banking sector on a stronger footing. This will be critical to assist and finance India’s next wave of economic growth.

The writer is the president of Assocham and MD & CEO of YES Bank