2017 has been a watershed year in many ways for India's economy

As the end of the year approaches, business evangelists across the world begin their tradition of reflecting upon the key developments of the past 12 months and predicting the direction of 2018.

I believe that 2017 has been a watershed year in many ways for the Indian economy, albeit not fully appreciated. We need to look at some significant developments that have taken place in the last 18 months to try and understand the impact on the business environment in India.

This period saw two major developments –demonetisation and the introduction of GST.  In addition (over the last 12 months), the government introduced/operationalised key reforms aimed to address structural economic and transparency challenges that included the Insolvency and Bankruptcy Code (with a subsequent ordinance prohibiting exiting promoters or other bidders in default of their loan obligations from bidding for the companies under insolvency), Bank re-capitalisation plan, Real Estate Regulation Act and Benami Transactions (Amendment).  We also saw an increased focus on corporate governance (the Kotak Committee has given its recommendations) and continuing impetus on digital transactions with e-procurements in government, linking of bank accounts, mobile numbers, PAN to the Aadhar, etc.  Add to this the Voluntary disclosure of assets scheme that was launched earlier by the present government, direct benefit transfers and elimination of subsidies.  Another set of developments included the government’s focus on increased spend on urban and rural infrastructure, labour reforms, Foreign Direct Investment regulations being liberalised, continuing push for reforms at the state level through rankings of states on the ease of doing business and high profile privatisation plans.

It would be difficult to find a parallel in the world today of a country that can boast of so many initiatives on the economic front in such a short time span. And the impact of all this is showing: India has emerged as one the largest FDI destinations in the world (being ranked number nine on FDI inflows in 2016 with a total inflow of $44 bn). With Moody’s upgrading the Sovereign credit rating from Baa3 to Baa2 and India moving up on the Ease of Doing Business rankings by 30 places to number 100, international businesses are increasingly re-looking at their India strategy and there is a clear uptick in interest in India and deals involving foreign capital and investments.

While this looks like a positive story, there is another side of the picture.  On the domestic front, private investment has not kept pace with expectations. Indian business leaders still seem to indicate that they do not see the government’s policies as business-friendly enough, they do not see adequate demand in domestic markets and are experiencing a significant slowdown in export growth – leading to a lack of confidence in making new investments.  The narrative of the MSME sector suggests that demonetisation came as a blow to their traditional way of doing business and before they could recover, GST made its foray.  Furthermore, frequent changes in rules and regulations (changes in GST rates etc. continue), seem to have added to the woes of the business community and has increased the uncertainty in an already turbulent business environment.  This has contributed to a large extent to the three year low GDP growth rate of 5.7 per cent in the April – June quarter though the growth seems to have rebounded from that low to 6.3 per cent for the July – Sept quarter.

So, what does this all mean for the business in India going forward?  This is a question that everyone seems to be grappling with, without very clear answers.  To start with, one can argue that all the changes in regulations and policies are indicative of a clear game plan of the government; and that is to move towards a more rule-based and transparent business eco-system aimed at increasing India’s standing as a global economic and business powerhouse.  The tax reforms, demonetisation, insolvency laws and digital initiatives are redefining the rules of the game and Indian businesses are just beginning to understand and appreciate that.  Another conclusion that can be drawn from this is that there is a deliberate process of expediting the change, even at the cost of frequent re-calibration/adjustments in policies and regulations based on feedback from the ground.  I believe that we are witnessing a huge change from the way business has traditionally been conducted in India and the pace of change has left our businesses a bit breathless. In the midst of this change, has the Government been truly engaged and responsive and helped India manage this change?  The answer is probably a mixed bag.  The Indian business community continues to believe that the process has been slow and less than adequate. It appears that these concerns are now has being recognised at the highest level. The Prime Minister’s participation in the FICCI Annual General Meeting (AGM) for the first time and the proposed visit to the World Economic Forum (WEF) meeting in Davos in January, 2018 could be an indication of a more frequent and robust engagement with the Indian business community.  

It would not be surprising if we see the government continuing aggressively with their reform/change agenda in the run up to the 2019 elections, defying traditionalists who may predict a slowdown in the economic agenda in anticipation of the elections. So anyone who thought they will now get a breather – may have to rethink.

The message seems to be loud and clear – This is the new normal!

-By Nitin Atroley, Office Managing Partner – North, KPMG in India