Modi must focus on 3 factors to sustain 8% GDP growth

GST stabilisation, DTC implementation and banking reforms are crucial for sustaining high growth for a long period, says FICCI president Rashesh Shah.

As we enter into FY2019, the upturn in the economy coupled with stability in other macro parameters point towards a broader economic recovery.

The latest IIP data (7.5 per cent and 7.1 per cent growth in January and February respectively) also show that the economy is bouncing back strongly.

It is in line with the growth that has been witnessed since August last year in the core sectors of the economy, such as cement, steel and automobiles among others.

Early earnings indicators for the fourth quarter of 2017-18 also signal at an uptick which we anticipate will turn into a sustained earnings rise in the new financial year.

It can be reasonably safe to assume that 2018-19 is all set to signal the start of a distinct recovery in the corporate performance - improvement in numbers, better capacity utilisation and emergence of investment appetite - leading to a significant increase in the GDP growth in the next few quarters.

At the same time, the insolvency and bankruptcy process at the National Company Law Tribunal is gaining traction and we expect some big-ticket resolutions to come through this year.

With all these headwinds, we can expect the GDP growth would be back to the 8 per cent growth phase in the next financial year.

The challenge, though, would be to sustain the recovery and higher growth for a longer period of time than just a few years, which has been the case in the past.

A sustained GDP growth rate in excess of 8 per cent could truly harness the power of compounding and transforming the landscape of the country, creating the third largest economy in the world by 2030.

While it is a difficult objective, it is definitely not unreasonable.

Growth has been fairly good in the last few years, barring the short-term impact from the long-term structural reforms.

It is now hoped that these reforms will help boost economic growth and achieve a consistent 8 per cent-plus growth rate will not be a Herculean task.

In fact, in the long-term, we should actually target a growth closer to 10 per cent.

There are three key aspects that the government will need to focus on - refine and simplify existing reforms like GST, fresh reforms in critical areas like taxation and finally, the NPA clean-up should be given the same push as it has been in the last 18 months.

Unless banks clean up completely, it will be difficult to justify credit growth even when there might be demand for the same.

GST: What next?

GST was a seminal reform in the history of taxation in India. However, like with other industry-changing reforms, creating a political consensus was a difficult and onerous task.

Even the current Goods and Services Tax (GST) regime that could be implemented only from last July after a long delay saw a few compromises as the government was keen to push through the bill.

Going ahead, the GST regime has to move towards minimum number of slabs with reasonable rates, which would be possible with the required expansion of GST base through administrative measures and inclusion of almost all items in the GST net, especially petroleum products.

The GST council has succeeded in moving forward in the implementation of e-way bills and simplification in return filing, but a lot still needs to be done in terms of administrative simplification.

The GoM on simplification of returns working under the chairmanship of Bihar deputy chief minister Sushil Modi is expected to take this to its logical conclusion in consultation with the industry.

Reforms: Wave II

While the last wave of reforms brought in significant changes like GST, Rera, IBC among others, the government must not drop the ball on the issue.

The reforms agenda must continue in the right earnest.

A simple and stable direct tax law with reasonable rates and minimal exemptions is paramount.

The Arbind Modi committee is now drafting a new Income Tax Law with the report expected to be out in a few months.

It is hoped that its recommendations will provide a long-term roadmap for direct tax reform in the country.

Although, the current government will not be in a position to implement the suggestions made by the committee, it must initiate a larger debate on this to garner public opinion that may lead to at least the beginning of the much-needed reform in the direct taxes also, as quickly as possible.

The industry is also keenly waiting for the reduction of the corporate tax rate to 25 per cent from the existing 30 per cent across the board.

Ditto with the personal income tax with the top marginal rate of 30 per cent getting imposed at a lower Rs 10 lakh limit, which needs to be increased.

With GST in place now, a similar pro-active approach is required in the direct tax domain also.

NPAs: Nearing the endgame

Like GST, IBC has been a deep-rooted structural reform which has changed the way how bankruptcy works in India.

We are now nearing the endgame for what has been a process that started a few years back with Reserve Bank of India’s asset quality review.

It is now time to take this to the logical conclusion, not just for the existing NPA challenges but also set a marker for the future.

Although constant concerns have been raised on the IBC’s capability, there is no doubt about its long-term impact on growth like the GST.

It has already emerged as a strong tool for stressed asset resolution and the higher bids placed clearly shows that if supported with patience, it will yield desired results.

At the same time, there needs to be a strong governance and structural change at the base, to ensure that we don’t see this situation again in the future.

The government also needs to make its intentions clear on the rationalisation and privatisation of public sector banks as a banking ecosystem with few strong PSU banks would be more capable of handling NPAs than what it is right now with 21 PSU banks.

Even if a decision in this regard is not possible at present, the expression of intent to discuss such a strategy before going into the elections may not be a bad idea.

This is not the time to sit back and rejoice. It is time of action.

The economy is now starting to recover and things are expected to only get better.

If we grab the opportunity with both hands and work together to continue our reformist agenda, we are on our way to seeing a new and improved India in the near future.

Rashesh Shah is president, FICCI

Photograph: Rupak De Chowdhuri/Reuters