Riding on huge government spending on infrastructure and the introduction of a series of economic reforms, the Indian economy is showing signs of recovery after a few sluggish quarters.
Demand is once more on the rise for cement, power, steel, fertilisers, metals, light commercial vehicles, tractors, motorcycles and passenger cars. Loans for durable goods, housing, education and on credit cards are growing at a rate of 19% year-on-year. Even rural demand, which had been decelerating since 2011, seems to have bottomed out.
A Standard Chartered Bank index, which apart from rural demand includes motorcycle sales, rural wages and non-durable goods, hit a 16-month high in March this year while Mahindra & Mahindra, the loan unit of India's largest tractor manufacturer, saw growth in the last quarter after a prolonged decline.
Anubhuti Sahay, chief economist with Standard Chartered, the largest international bank operating in India, believes that an above-normal monsoon and the imminent increase in salaries of government employees -- a proposal for a 3% hike is under review -- could further push consumer demand and put the economy on a higher growth trajectory.
Generous government spending on infrastructure, especially on railways and on roads, had contributed to the recovery, she told Asia Focus. She also expects that the reform legislation introduced by the administration of Prime Minister Narendra Modi over the last two years will make a positive impact on the Indian economy in the "medium and long term".
The government, attempting to burnish its business-friendly image, has amended and simplified a host of laws to make it easier for investors to do business in the country. It has liberalised foreign direct investment (FDI) and passed 16 amendments into the Companies (Amendment) Act 2015, among them provisions that make incorporating and starting a business much easier for a new company, and allowing parent companies to lend to wholly owned subsidiaries.
It has passed the Insolvency and Bankruptcy Code, 2015 simplifying the procedure for closure of a failed business and setting a deadline of 180 days for doing so -- about one-eighth of the average time it currently takes -- as a company can secure no-objection certificates from employees and partners and no-tax liability from the tax authorities. The law proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator.
The Bankruptcy Code has been hailed as the biggest economic reform, second only to the Goods and Services Tax (GST).
The government has also legislated the Real Estate (Regulation and Development) Bill which will put in place the institutional infrastructure to protect the interests of homebuyers. At the same time, it has successfully pushed the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Bill through the Rajya Sabha, the upper house of Parliament, where the Modi-led National Democratic Alliance does not have a majority.
All told, the two houses in the last parliamentary session passed 18 major laws including the Insolvency and Bankruptcy Code, the Aadhaar, the National Waterways Bill, Mines and Minerals (Development and Regulation) Amendment Bill, Industries (Development and Regulation) Amendment Bill, and the Real Estate (Regulation and Development) Bill.
Now the government's next target is to push more reforms through the legislature during the monsoon session which is expected to begin in the third week of July. These could include the Code for Resolution of Financial Firms (CRFF), Public Utility Dispute Resolution Legislation, the Benami Law, the GST, and more amendments to the Companies Act to further simplify laws governing investment and business. The government has set up a committee of experts to review various provisions of the Companies Act and suggest more improvements.
The CRFF would apply to banks, insurance companies and non-banking financial companies, while the Public Utility bill would provide a legal framework for faster resolution of disputes in PPP (public-private partnership) projects. The Benami law would help the government check the growth of "black money" within India. With these reforms, the government would wrap up a major part of its reformist agenda. It is also in the process of allowing 100% FDI in asset reconstruction companies (ARCs). This would help banks get out from under piles of bad debts.
Discussing the reform legislation in the pipeline, Finance Minister Arun Jaitely told The Times of India on May 27 that the government's "thrust will be on three sectors -- rural India, infrastructure and work is in progress on social security steps that will allow us to offer a composite package by the time the government's five-year term ends. After this, it's really the implementation issues".
DK Joshi, chief economist with Crisil, is satisfied with what the Modi government has done on the economic front and agrees with Jaitely that the second half of the current year should focus on implementation of the structural, banking and power reforms.
"2016 is going to be a test year. The government should implement on an urgent basis whatever it has committed. It will have a benign effect on the economy," Joshi told Asia Focus.
Madan Sabnavis, chief economist with CARE (Credit Analysis & Research) Ratings, agreed with Joshi that the government had played its part in reforming the Indian economy: "There was policy paralysis and corruption under the earlier government. These have been addressed. 120 billion accounts have been opened under the Prime Minister's Jan Dhan Yojana (PMJDY). The government has done well," he said.
However, he is not sure how much more the central government can do and faulted businesses for asking for more reforms. "The government can only be an enabler of the economy. It can only do Part 1. Now it will be about implementation of policies and laws," Sabnavis said.
He is also sceptical about whether the GST could add between 1.5% and 2% to GDP as some economists have claimed. "It has been wrongly interpreted. It is not going to add anything and is only an efficiency enhancing mechanism," he said, adding that the pace of economic growth would depend on what the states did at their end. "There is too much focus on the centre because it is single entity. We should remember that India is decentralised".
The government has made huge investments in roads, railways and MNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme), which commits a certain number of man-days of work to people living in villages and irrigation sector to fight off distress caused by drought.
According to Birendra Singh, Union Minister for Rural Development, the government increased the funds for the MNREGS from $5.56 billion to $6.76 billion.
India's budget for 2016-17 earmarked US$5.41 billion for the farming sector -- irrigation, crop insurance, a national e-market for farm produce, pulse production and interest subsidies -- 44% more than in the 2015-16 budget. The government has allocated $33.26 billion for infrastructure, almost all of it for roads and railways alone.
As well, the prime minister has released $1.5 billion extra for the completion of many stalled railway projects. Indian Railways is redeveloping 400 major stations and plans to introduce a host of semi-high-speed trains in the next few years. The pace of road construction has picked up substantially in the last two years.
As well, the government is committed to providing electricity to all 638,000 villages by 2018. As of January, 14,133 of these villages still lacked power. More than 70% of India's 1.3 billion people reside in villages.