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Taking Stock, Breaking the Slowdown: A Look at Impact of Reforms

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Government has been taking several measures to achieve the ambitious goal of USD 5 trillion economy. In the recent press release, government took stock of several measures to bring cash flows to spur consumption and enable capital markets and financing to boost investments. There is changed emphasis on disinvestment to enhance economic efficiency. Given to the steps taken by the Modi government, trend of greater formalization and more remunerative jobs is emerging in the Indian economy.

Measures on Consumption Side

Enabling cash flows in the economy fosters consumption. Anticipated consumption boosts investments and sets a virtuous cycle in of positive growth in the economy.

  • NBFCs and Housing Finance Companies (HFCs) provide retail lending to home buyers. Partial credit guarantee scheme for NBFCs and HFCs was put in place to take off some of the stress on them.
  • Further, the clearing of dues by PSUs has put more cash flows in the economy. In the last two months, more than 60% dues of 32 Navaratna and Maharatna PSUs were cleared. Online Bill Tracking system will reduce the bill pendency and reduce accounts payable of CPSEs.
  • All PSBs have introduced repo-linked products following the RBI guidelines expediting the transmission of RBI rate cuts down to the borrowers for cheaper loans. More than 8 lakh loans amounting to Rs 70,000 crore has been given up till November.
  • Cash flow is critical for MSMEs. They use their bills for discounting to tide over cash flow problems. Over 5 lakh bills amounting to Rs. 12,698 crores till 15th Nov 2019 have been undertaken in this window
Measure to Boost Investment

Government capex have crowding in effect on investments. Corporates face the risk-return trade off when they invest. Last mile financing along with credit expansion by banks ensures growth in the investments.

  • More than 2/3rd (66%) of budgeted Capex of Rs. 3.38 lakh crores already undertaken. Cumulative capex of Ministry of Railways, Road Transport and Highways along with Navaratna and Maharatna PSUs will exceed Rs. 3.46 lakh crore by December 2019.
  • Government had approved a realty fund (SWAMIH) worth Rs. 25,000 crores for stalled housing projects for last mile funding. The actual impact of this fund will be many times of this because on average the construction cost is 1/5th of the cost of the project. If we suppose that on average these projects are half done then at least 10 times the impact of this last mile funding will be in releasing projects.
  • Continuous liberalization to boost investments in the Indian economy has resulted in record FDI inflows of $35 bn in H1 2019 against $31 bn in H1 2018.
  • Corporate tax rate cuts have enhanced the risk-return trade off that corporates face when they invest. 15% corporate tax coupled with large markets and large labour force make India attractive investment destination among peers.
  • Further, to enable and protect honest decision making in PSBs, Internal Advisory Committee (IAC) in banks classify cases as vigilance or no vigilance. Advisory Board for looking into Bank frauds was set up.
Key Reforms in Capital Markets

Below are some of the key reforms in capital markets to enable financing which will help fund investments.

  • Law passed by Parliament for setting up unified regulator for International Financial Services. It increased capital flows by reducing regulatory and compliance burdens. It will bring bank trading of Indian financial products from offshore centres.
  • One Unified market across the country for financial instruments through rationalisation of Stamp Duty. It was a key recommendation of H. R. Khan committee to foster Development of Corporate Bond Market. This move will significantly expand the corporate bond market.
  • A framework to allow shares with Differential Voting Rights (DVRs) It is very important move for start ups as they need to avail funding without losing control over the company. So, the move enables funding for start ups.
  • Norms applicable for Credit Rating Agencies have been tightened. It will enable further development of credit markets. CRAs are critical cog in the corporate loan market as investors look at them for information on risks.
  • Interoperability among clearing corporations has been implemented enabling efficient use of capital for clients who trade on multiple stock exchanges.
Changed Emphasis: Disinvestment to enhance economic efficiency

Government resorted to disinvestment in non-priority areas where competitive markets have come of age. It will enable private buyers to bring capital, technology and better management apart from enhance productivity and thereby economic growth. Disinvestment of BPCL, CONCOR and Shipping Corporation of India are such examples.

Bharat Bond ETF was launched to enable private participation and wider pool of financing for CPSEs.

Important Trends Emerging in the Economy

A significant shift in the work force composition in the economy is visible when data of 2011-12 compared with 2017-18. This shift can be correlated with the steps taken by the Modi government such as Start-up India, MUDRA scheme. Below are the highlights

  • Greater formalization of work force is visible by drop in casual labour driven by rural workers. The per cent of Casual workers is down by 5% but that of regular salaried has gone up by 5%. This translates into about 2.3 crore jobs moving from casual workers to regular salaried ones. Among self-employed, shift from unpaid family work to own account work.
  • In Rural areas there is shift from casual workers to salaried jobs and self-employed. On the other hand, in Urban areas there is shift from self-employment to salaried jobs.
  • Workforce in the organized sector has increased by 2%. It stands 19% in 2017-18 compared to 17% in 2011-12 with the concomitant decrease of 2% in unorganized sector. Within the organised sector, jobs are shifting towards formal work.
  • Looking collectively at all these, there is change in the nature of work. In aggregate there is increase of about 3.2% in remunerative jobs. It is consistent with increase in the salaried workers, proportion of industry and services sector.

Thus, the steps taken by the government are reflecting on the ground and in the changing nature of the economy.