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Set The Imbalances Right

There is a huge opportunity to correct our lacklustre industrial development and get entrenched in the global supply chains

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I am relieved to see a clear majority for the ruling coalition. Such a mandate has the effect of endorsing the economic interventions and reforms made by the government while an adverse mandate would result in perceived messaging of rejection. While we in the markets worry about corporate performance, it’s a matter of satisfaction to see people reward the government for its work in providing basic amenities like gas, electricity, roads, toilets etc. How can people participate in the economic process unless they are free from the worries of basic necessities like water, education etc. Team Modi has all the right ideas on this front and hence I am very bullish on India’s prospects and its future.

The US-China trade war is hitting fever pitch. There is a huge opportunity to correct our lacklustre industrial development and to get entrenched in the global supply chains. The natural advantages of a huge domestic market, cheap labour, a peninsular coastline etc. are all there; the current scenario presents us a crack in the prevailing world order.

Closer home, I think that the base is set and we are about to emerge out of the consolidation of the last few years. Serious reforms have been enacted in the form of GST, RERA and IBC. There’s clean up and consolidation of the banking system. Initiatives like demonetisation have been praised by some and critiqued by many for lack of convincing data; the same applies to asset quality review accompanied by kitchen-sinking of corporate portfolios. Yes, the data is iffy but not enough has been said about the culture change that these shocks will bring about in future with regards to responsible borrowing, tax compliance, reduction in corruption and respect for the law of the land. Hence, I wish the new government stays the course with sharper execution and follow up. On taxation, rationalisation of GST into a couple of basic rates is a must. Rethinking how we treat risk capital is a dire need; the way we are triple taxing dividends which are coming from tax paid profits, further applying STT and tax on long term capital gains or perquisite taxes on ESOPs even before liquidity events materialise, the controversial angel tax or the row with Wal-Mart, tax queries to FPI investors — all of this shows lack of appreciation of the role entrepreneurship and equity capital plays in economic growth and most importantly in innovation.

Lastly, we are finding ourselves currently amidst a crisis in the credit markets. I think putting this down to liquidity is a misrepresentation of a deeper malaise. There is a lack of belief in the creditworthiness of the NBFC sector at large, which emerges from lack of belief in the creditworthiness of borrowers, mainly the real estate sector. Providing liquidity or tightening regulations, albeit both required, is to treat symptoms. If we wish to stabilise debt markets, we need to restore vibrancy in the real estate sector. Real estate is the biggest potential employer and a multiplicative driver of economic growth. Yes, we must correct imbalances, ensure systemic safeguards and punish bad behaviour, but it should not be that we get so busy teaching the market and some of its perceived errant participants a lesson, that we end up freezing growth engines thereby killing our already anaemic growth.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Motilal Oswal

Motilal Oswal, Chairman & managing director, Motilal Oswal Financial Services

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