We shall see a rejuvenated India in 2017

RANA KAPOOR | Updated on January 16, 2018 Published on December 30, 2016

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Structural reforms such as GST, Bankruptcy Code and demonetisation will lead to positive economic and behavioural spin-offs

Year 2016 turned out to be fast paced and eventful, punctuated by significant and unpredictable political and economic changes. Two key global shifts have managed to define how 2016 shaped up.

The rise of populism in the globalised world economy has never been as palpable as it was in 2016, highlighted by events such as Brexit, the US Presidential election, and the recent referendum on reforms in Italy.

With global economic recovery still remaining subdued, the popular discourse over relentless use of unconventional monetary policy support has now started to pave way for a prudent fiscal policy role in countries like US, UK, and Japan.

These global undercurrents will continue to dominate economic and financial outcomes in 2017.

For India, the year 2016 saw its multilateral acknowledgement as an Oasis of Opportunity. The transition from a state of crisis of confidence in 2013 to a bright spot in a cloudy global horizon is not an accident. Clairvoyant and meticulous policy design has ushered in this economic turnaround. Reduction in retail inflation and compression of the twin deficits are critical macro accomplishments. To achieve this, the government has been continuously utilising the executive space to deliver not only high-impact micro reforms but also critical structural reforms that have begun to redesign our macro frameworks and institutions.

Indeed, India’s ranking in the Global Competitiveness Index for 2016-17, released by the World Economic Forum, improved 16 places to 39, the fastest improvement up the ranks among 138 countries surveyed.

M&A activity in India rose to $70 billion across 1195 transactions in 2016, a record high level fuelled by a wave of consolidation and rising confidence in India’s growth prospects.

Year of institution building

The role of institutions in fostering economic growth has successfully entered the modern policy discourse. After all, institutions help in laying down the rules of the game, create transparency, weed out room for populist discretion, improve efficiency, and make the process of economic growth sustainable.

The year 2016 saw the foundation for three structural institutional pillars.

GST: The GST, a milestone in indirect tax architecture, is expected to be a potent tool to address the current inefficacies while allowing the State and the Central Government to adhere to the path of fiscal consolidation.

After getting cleared by both the houses of the Parliament earlier in the year, so far, the GST Council which has representation of states and Centre has managed to take a unanimous decision on most issues including the finalisation of rates, threshold for exemption and compensation to States.

By metamorphosing India into a single unified market, nearly seven decades after its political integration, GST is expected to maximise the size of economic pie.

MPC: After embarking on the flexible inflation targeting framework in 2014, the next impactful reform in the area of monetary policymaking was the creation of the Monetary Policy Committee. The combination of rules based policymaking and accountability has raised the central bank’s credibility.

Bankruptcy Code: Earlier in the year, the Parliament cleared the Insolvency and Bankruptcy Code. The Code, which has been in operation from December 2016 onwards, is expected to ensure time-bound settlement of insolvency and enable faster turnaround of businesses.

The last few weeks of 2016 have been dominated by the de-legalisation of high denomination currency notes in circulation. This is a master-stroke and a brilliant example of large-scale inclusive behavioural reform.

With incentives being put in place, the desired behavioural impact has already started to manifest. Use of cash alternatives like debit/credit cards, cheques, mobile/internet banking, e-wallets, have zoomed since the second week of November. The process of demonetisation will help in boosting household financial savings, enhance monetary policy transmission mechanism, and in conjunction with the GST help in establishing a transparent financial trail for economic transactions.

Overall, the demonetisation exercise will help to usher in a New Transactional Era for India that will create multiplier effects through the financial channel.

Banking and finance

Even as the overall domestic macro situation improved in 2016, the banking sector continued to face challenges due to lack of recovery in asset quality, capital constraints and sluggish profitability. Nevertheless, 2017 will be the inflexion year for the banking and finance sector, as improvement in macros start to gradually manifest in balance sheets of corporates.

The ongoing demonetisation exercise will incentivise financial inclusion. Moderation in currency in circulation will help lower cost of handling cash; the bankruptcy framework will help ensure in a quicker resolution of stressed assets; and the GST framework will lead to further formalisation of the economy, stimulating both consumption and investment.

The year 2017 will also be important as the introduction of new IFRS accounting norms will kick in. While this may lead to some tightening in capital provisioning, the overall system is expected to gain in terms of better disclosures.

This new year will offer opportunities for nimble footed in the banking and finance sector. At the same time, it will pose requirements for re-platforming of PSU banks and exploring out-of-box ideas for monetisation of idle PSU assets.

India is fast becoming an active incubation centre for e-commerce with such ventures expected to reach 10500 by 2020 as per NASSCOM. We are witnessing an entrepreneurial economy characterised by DICE – Design, Innovation & Creativity-led Entrepreneurship. The technological penetration of the banking and finance sector will improve further in 2017 in order to support this new age requirement.

The advent of the JAM Trinity is a silent revolution that will transform India. As gateways like the recently launched UPI platform gathers mass in 2017, it will generate basic digital intelligence, with the market for e-finance providing one of the biggest opportunity for the banking and financial system.

We are at the cusp of transformational shifts with the banking and finance sector being an important change agent.

The writer is the MD & CEO of YES Bank

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Published on December 30, 2016
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