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April 26, 2017

Indian Economy: 3 years after, 3 key takeaways

In May 2017, the Narendra Modi-led National Democratic Alliance will complete three years of its five-year term. Three key highlights of the third year of the NDA are:

  • Passage of the Goods and Services Tax by Parliament, which will likely usher in significant benefits and lift India's growth trajectory.
  • Demonetisation of high denomination currency, which is being leveraged to move India towards a 'less-cash' economy and formalised economy.
  • Consolidation of political power by the ruling party which shows it is possible for a government to take hard decisions without eroding political capital.

  • The reform momentum and political mandate will mean India will continue to improve its competitiveness ranking and remain an attractive investment destination.From a global context, India stands out for two reasons – stable macros and prudent fiscal and monetary policies. India's growth-inflation mix has improved, durably. Fiscal and monetary policies are more prudent, focussing on raising the quality of growth and not just the rate of growth.Yet, many areas need improvement and slow progress is limiting upsides.

Investments remain a drag on growth. Weak balance sheets of companies and low capacity utilisation continue to be deterrents. Second, the fiscal health of the states, which are now being projected as the engine of growth, needs to be improved.Thirdly, mounting bad loans on the books of banks impair their ability to aggressively finance growth.One of the stated objectives of the Modi government was to empower the states.The dismantling of the Planning Commission together with increasing the share of states in central tax revenues has meant states now have greater flexibility in spending the transfers received from the Centre. Most of the reforms initiated by Modi government continue to be work in progress. The remaining two years should focus on effective implementation of the reforms and measures already announced.