Leaping from a strong foundationhttps://indianexpress.com/article/opinion/columns/year-2016-gst-the-bankruptcy-code-constitution-of-the-monetary-policy-committee-2017-global-socio-economic-shifts-4462632/

Leaping from a strong foundation

In 2017, the economy will see the benefits of the reforms from the previous year

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Reduction in retail inflation and compression of the twin deficits are critical macro accomplishments. (Representational image)

2016 was a year that will be remembered for unprecedented tectonic shifts in the global and domestic socio-economic landscape. For India, 2016 saw further affirmation of its status as a bright spot in a cloudy global horizon. India’s economic transition has been aided by clairvoyant and meticulous policy design over the past two years. Key institutional reforms that included the passage of GST, the Bankruptcy Code and constitution of the Monetary Policy Committee resulted in strong foundations for significant growth being laid down.

Reduction in retail inflation and compression of the twin deficits are critical macro accomplishments. To achieve this, the government has been continuously utilising the executive space to deliver not only high-impact micro reforms, but also critical structural reforms that have begun to redesign our macro frameworks and institutions.

Indeed, India’s ranking in the Global Competitiveness Index for 2016-17, released by the World Economic Forum, improved 16 places to 39, the fastest improvement among 138 countries surveyed. M&A activity in India rose to $70 billion across 1195 transactions in 2016, a record high level, fuelled by rising confidence in India’s growth prospects.

The last few weeks of 2016 have been dominated by the ongoing exercise of de-legalisation of high denomination currency notes in circulation, which will eventually pave the way for demonetisation. This is a masterstroke by PM Modi and, to my belief, a brilliant example of the first large-scale inclusive behavioural reform ever introduced in the world. Undertaking a step like this requires immense political courage — to impose transitional adjustment costs on the economy,while having the perspective to lay the foundation for sustained future benefits. With incentives put in place, the desired behavioural impact has already started to manifest. Use of cash alternatives like debit/credit cards, cheques, mobile/internet banking, e-wallets, have zoomed since November.

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Additionally, demonetisation will help in structurally boosting household financial savings, enhance the monetary policy transmission mechanism and, in conjunction with GST, help in establishing a transparent financial trail for economic transactions, thereby benefiting the government’s fiscal position. Overall, demonetisation will help usher in a new transactional era for India that will create multiplier effects through the financial sector channel. Even as the overall domestic macro situation improved in 2016, the banking sector continued to face challenges due to lack of recovery in asset quality, capital constraints and sluggish profitability. Nevertheless, I firmly believe 2017 will be the inflexion year for the banking and finance sector with support from the policy and regulatory environment, as improvement in macros start to manifest in corporate balance sheets.

Demonetisation will incentivise financial inclusion. A moderation of the currency in circulation will help lower the cost of handling cash, the bankruptcy framework will help ensure a quicker resolution of stressed assets, and the GST framework will further the formalisation of the economy while stimulating consumption and investment.

The year 2017 will also be important as the introduction of new IFRS accounting norms will kick in. While this may lead to some tightening in capital provisioning, the overall system is expected to gain with better disclosures, transparency and robustness. This makes me believe that 2017 will offer opportunities for the nimble-footed in the banking and finance sector. At the same time, it will pose requirements for re-platforming of PSU banks and exploring out-of-the-box ideas for monetisation of idle PSU assets.

Last, but not the least, India is fast becoming an active incubation centre for e-commerce with such ventures expected to reach 10,500 by 2020, as per NASSCOM. With a policy thrust on programmes like Digitisation and Start Up India, we are witnessing an entrepreneurial economy characterised by DICE —Design, Innovation & Creativity-led Entrepreneurship. The technological penetration of the banking and finance sector will improve further in 2017 in order to support this new-age commercial requirement.

The advent of the JAM (Jan Dhan, Aadhar and Mobile) Trinity is a silent revolution that will transform India. As gateways like the recently launched UPI platform gathers mass in 2017, it will generate basic digital intelligence, with the market for e-finance providing one of the biggest opportunities for the banking and financial system.

With 2016 laying the foundation for critical reforms in the country, I believe we are at the cusp of transformational shifts in the future, with the banking and finance sector being an important change agent in this exciting journey.