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The 16th Lok Sabha results have given a clear mandate to the BJP-led NDA Alliance, and its formation will mark the beginning of a series of reforms to revive growth to beyond 8 per cent. Such a target does not appear too unrealistic, though is difficult.
The present domestic savings rate is roughly 30 per cent of the 2013 GDP. The long-term Incremental Capital Output Ratio (ICOR) for India is 4.5.
Assuming domestic savings are increased by another 5 per cent over the next five years and ICOR drops to below 4, the expected trend rate should move up to 8 per cent.
This brings us to primarily two sets of reforms – augmenting savings, which includes tax reforms among others, and ICOR augmenting reforms that include productivity enhancing measures. Household sector is the only surplus sector in India’s economy and contributes to 75 per cent of total savings. Hence, one can expect this sector to be first beneficiary of the reform process.
The first way to augment savings is to address the issues of inflation. One way of tackling the persistence of food inflation is to encourage all states to amend the APMC Act and implement the same.
Also, giving incentives for setting up cold chains and warehouses and extending weather-based insurance system could be other steps.
One can also expect a policy of cluster development, expediting work on several industrial corridors, and a major thrust to integrate technology in MSME production lines.
If the intended trajectory of the reforms is as highlighted above, banks will have a major role to play. Since productivity gains require technological intervention, banks will have to develop credit appraisal systems that visualize such gains and price risk accordingly. Since infrastructure could be the next big area for reforms, we will need proactive policy for a thriving secondary market for private sector debt so as to step-up infrastructure funding for long-term projects.
We hope the new government also undertakes reforms like provisions for more independent directors on bank boards and greater autonomy to bank boards in determining compensation and other policies.
(The author is Chief Economic Advisor, State Bank of India. Views are personal)
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