Structural Reforms Unleashing Megatrends in the Economy

Structural reforms

 

It is now widely accepted that the emergence of Indian economy as an economic powerhouse began with the path-breaking economic reforms of 1991. India’s GDP multiplied 10 times since 1991 and presently, India is the third largest economy in the world in PPP (Purchasing Power Parity) terms. Structural reforms akin to 1991 are happening now. GST is a major structural reform. Other reforms like RERA (Real Estate Regulation Act), Insolvency and Bankruptcy Code, Benami Act, Jandhan and Aadhaar-linked initiatives are unleashing profound consequences which, in turn, are paving the way for some mega trends in the economy. An insight into these emerging megatrends in the economy will enable investors to spot the winners sufficiently early. Let us try to discern some broad emerging megatrends.

FORMALISATION OF THE ECONOMY

Decline of the informal sector and formalisation of the economy are inevitable. This is a true megatrend that will have major consequences. The informal unorganised sector accounts for 40 per cent of India’s GDP and lion’s share of total jobs. Demonetisation shook this sector and GST will accelerate the process of shift to the formal sector. The informal sector, which thrived on tax arbitrage, will yield market share to the formal sector. In some segments, the informal sector is 50 per cent of the industry.

In segments like building materials, auto-ancillaries, textiles etc. the formal sector is likely to make big inroads and expand market share at the expense of the informal sector. The potential gain for the formal corporate sector is huge. This has important implications for investment.

FINANCIALISATION OF SAVINGS

Another megatrend that has huge implications for the market is the financialisation of savings: the shift of savings from physical assets like gold and real estate to financial assets. Within financial assets, there is an increasing preference for equity and mutual funds. Presently, financial savings are 40 per cent of Gross Domestic Savings. Within financial savings, equity and equity mutual funds attract only 8 per cent. This figure is rising fast due to crack down on black money, improving financial literacy and better growth prospects. The inflow of money into equity through the stable SIP (Systematic Investment Plan) route has increased by 50 per cent during the last one year. Financialisation of savings and the increasing preference for equity is likely to keep market valuations above historical averages.

A CLEANER ECONOMY

Extension of the use of Aadhaar is highly desirable from the economic perspective. Already several crores of ‘ghost ration cards’ have been identified. Linking of PAN with Aadhaar will lead to cancellation of several lakhs of illegal PANs, which have been used for illegal activities and tax evasion. It has been estimated that government can save Rs. 2 lakh crores from technology-enabled initiatives in the next 10 years. Aadhaar-based Direct Benefit Transfer will reduce leakages and make public expenditure more efficient.

RERA has caused short-term hiccups. But it will certainly positively impact the real estate market in the long run. The decline in real estate prices, observed in many areas, is the consequence of disappearance of speculative transactions, financed by black money, in the real estate market. Going forward, it would be extremely difficult to conceal black money in real estate. RERA, along with Benami Property Acquisition Prevention Act will usher in a cleaner real estate market.

One of the path-breaking reforms of recent times is the Insolvency and Bankruptcy Code 2016. India has been notorious for ‘sick industries with prosperous promoters’. The Insolvency and Bankruptcy Code can force promoters to sell assets to remain solvent. If not, the banks can remove the promoters and appoint a professional to run the company till it is finally auctioned. These reforms are major structural shifts that can reset the Indian economy by making it cleaner and transparent.
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