Download Choosing trend over cycle

Choosing trend over cycle
Ergo, the Modi regime has been a mix of repair and reforms
July 2016
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Dharmakirti Joshi
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Raj Nambisan
Director
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Dipti Deshpande
Senior Economist
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Subrat Mohapatra
Associate Director
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Sakshi Gupta
Economist
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Adhish Verma
Economist
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Pankhuri Tandon
Economic Analyst
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Choosing trend over cycle
Ergo, the Modi regime has been a mix of repair and reforms
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Table of contents
Executive summary .................................................................................................................................... 6
Why the quality of growth is different this time ......................................................................................... 9
Growth is on a sustainable footing because… .................................................................................10
An alternative approach to measuring quality of growth .................................................................12
Measuring the Modi government’s performance ..................................................................................... 14
What the Modi government has done to raise the bar .....................................................................15
The next big step: network readiness ..............................................................................................21
Can Digital India lead to a developed India? ............................................................................................. 24
Where digitalisation can make a difference ....................................................................................26
But there are caveats ......................................................................................................................29
What does all this mean for fiscal 2017? .................................................................................................. 30
Annexures ................................................................................................................................................. 33
1: The wings of digitalisation and how far the government has spread them ..................................33
2: External environment a mixed bag for India ................................................................................37
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Executive summary
Governments can either push up the economic cycle using monetary and fiscal policy tools or they can
choose to raise the trend – or potential – growth through reforms. Global experience suggests structural
reforms are not only onerous but also raise the trend growth with a lag. In contrast, aggressive monetary
and fiscal policies can have a steroidal, and often short-lived, impact on growth.
We believe the initiatives of the Narendra Modi-led government, if relentlessly implemented, will do more
to raise India’s trend rather than cyclical growth that we are witnessing now. Today, India is among the
few countries – and the only large economy – whose 2016 growth prospects have not been scaled down.
Call it the power of small steps + good luck on oil.
As we know, the Narendra Modi government hasn’t been very successful in initiating ‘big bang’ reforms,
especially on land and labour laws, caught as it has been in political maelstroms, and has preferred the
second-best option – of partly shifting the onus of liberalisation to the states.
And then there is the Goods and Services Tax Bill, the biggest tax reform in recent memory, hanging fire.
But to the government’s credit, it hasn’t let itself be overwhelmed by such obstacles and has instead
initiated measures – both incremental and new – that would improve India’s competitiveness. We believe
this will remain work in progress for some time and the momentum needs to continue through the political
cycle to get bang for the buck.
In this context, two dimensions of India’s growth story need special mention: the quality of growth, and
the potentially disruptive impact of digitalisation.
Quality of growth is key, and that’s improving
India’s GDP growth, after dropping to sub-6% in fiscal 2013, rebounded to 7.6% last fiscal. We expect it to
improve further to 7.9% this fiscal, provided monsoon is normal and the global situation does not
deteriorate from here.
Unlike the sharp recovery seen after the global financial crisis of 2008, the current one has been gradual,
but more sustainable.
That’s because the growth we are seeing is not driven by monetary and fiscal steroids. The fiscal policy,
encouraged by low crude oil prices, has been quite prudent, and has aimed to improve the quality of
spending through better targeting, and scaling up of infrastructure investment, while keeping a tab on
overall deficit. The government, together with the Reserve Bank of India, has initiated the process of
modernising central banking by adopting an explicit inflation targeting framework and setting up the
Monetary Policy Committee, which will engender a low and stable inflation regime in India. Food inflation
still remains a major challenge, and here, the ball is in the government’s court.
Secondly, growth this time is not supported by excessive leverage, or rampant credit creation like in China.
Domestic credit growth has averaged 9.8% per annum in the last two years compared with a 10.2%
nominal GDP growth.
Finally, growth is accompanied by a mix of repair and reform. Over the past two years, steps have been
taken to mend the electricity and banking sectors, but this remains work in progress.
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The current fiscal, therefore, will be closely watched for more reforms and relentless implementation of
executive and policy actions already announced. To be sure, measures by the Modi government since
taking office in May 2014 have improved India’s competitiveness and ease of doing business rankings. The
government has also managed to pass two key Bills – the Insolvency and Bankruptcy Code Bill, 2016,
which strives to create an enabling environment for expeditious resolution of bankruptcies with least pain
to all stakeholders, and the Aadhaar Bill to distribute subsidies, rural wages and pensions through an
electronic platform.
Then there’s the digitalisation upside
The government has been quick to board the technology bandwagon with its 'Digital India’ programme,
which aims to speed up financial inclusion and deliver government services electronically by increasing
internet connectivity and improving online infrastructure.
Typically, economic reforms lead to predictable or linear outcomes, but technology-driven solutions, more
often than not, have a disruptive or non-linear impact. The convergence of mobile connections, Aadhaar
biometric identification process, and no-frills bank accounts, provide an unprecedented opportunity to
bring large swathes of the unbanked into the ambit of formal finance. By transferring rural wages and
cooking gas and kerosene subsides digitally, the government is able to target beneficiaries efficiently and
also save money by reducing leakages.
And the introduction of the Unified Payment Interface, which will allow customers to instantaneously
transfer funds across different sources/banks with the use of a single identifier, can prove transformative.
Technology’s potential is enormous, some of it even unimaginable. However, as long as basic digital
infrastructure – internet penetration and electricity access – is not in place, it will remain unfulfilled.
Digitisation and digitalisation1 will create an efficiency-led spurt in growth over the medium run. But to
run a growth marathon and also simultaneously address challenges of poverty and under-development in
a balanced and sustainable way, there is a need to amplify efforts – in education, healthcare and
infrastructure – and to take initiative to create livelihood opportunities.
Only then can India leapfrog out of the grind.
Digitisation is the process of changing from analog to digital form, and mainly pertains to data/ records. Digitalisation is the use of digital technologies
to change a business or governance model, and provide new revenue and value-producing opportunities; it is the process of moving to a digital business.
Therefore, digitisation is an essential component of the digitalisation process.
1
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Why the quality of growth is different this time

Lifting ‘trend’, and not ‘cyclical’ growth, has been the policy focus

Current growth is accompanied by prudent fiscal and monetary policies

Focus is on repairing the system along with reforms where possible

But more efforts are needed to improve health, education and infrastructure outcomes to enable
participation in the growth marathon
Two years since the Narendra Modi-led National Democratic Alliance government took oath, India ranks
among the few countries – and the only large economy – whose 2016 growth prospects have not been
scaled down. Although ‘big-bang’ reforms on land and labour are missing, the government has initiated a
number of steps to improve the business climate and reform key sectors. Despite this, a major policy win
has been the passage of the Insolvency & Bankruptcy Code Bill by both houses of Parliament. This
legislation will strengthen creditor rights and facilitate lending. And the passage of the Goods & Services
Tax (GST) Bill in the monsoon session of Parliament in July-August 2016 looks very likely.
Amid these moderate reforms, India’s economic growth is picking up, albeit at a slow pace, after having
dropped below 6% in fiscal 2013. Policy focus hasn’t been on boosting the cyclical part through fiscal and
monetary stimulus, but rather on improving trend growth by repairing the system and initiating structural
reforms.
Structural reforms take time to impact the economy. So how much the trend improves depends a lot on
how the repairs and reforms are carried out, particularly in the second half of the government’s term when
the political cycle typically starts.
To be sure, this isn’t the first time in the past decade that India’s GDP has risen from lows. In fiscal 2009,
growth had slipped more than 250 bps but then sprung back nearly all the way up by fiscal 2011. That
rebound had come on the back of both monetary and fiscal stimuli. Not surprisingly, growth declined after
the stimulus was withdrawn and policy paralysis set in. This time around, growth is slow to pick up, but
appears sustainable and qualitatively better as it is accompanied by prudent fiscal and monetary policies
and a ‘repair-and-reform-oriented’ policy approach.
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Growth is on a sustainable footing because…
A. It is achieved in an environment of prudent monetary and fiscal policy
Growth this time is not fired by steroids, unlike in 2009-20112. The fiscal policy, encouraged by low
crude oil prices, has been quite prudent. The government’s spending focus is on creation of
infrastructure, especially rural roads, irrigation, shipping and railways, while keeping a tight leash on
overall spending. This can draw in private investment and drive up the economy’s potential, and that’s
why we believe growth would steadily tick up. The government is more focussed on potentialenhancing policies such as driving rural roads expansion (and thereby employment) and supporting
entrepreneurial activity, rather than rights-based programmes such as Mahatma Gandhi National
Rural Employment Guarantee programme (MNREGA), which contributed more to inflation rather than
push productive capacity. Fiscal consolidation will help keep inflation under check and indirectly
benefit the economy by bringing down the cost of borrowing for both the government and the private
sector.
At the state level, even though fiscal deficit inched up in fiscal 2015, the quality of spending has been
improving. That the state governments ran revenue deficit of merely 0.1% of GDP in fiscal 2015 implies
that a dominant part of their deficit is on account of financing capital expenditure. The Reserve Bank
of India (RBI)’s report on state finances noted that the quality of expenditure of most Indian states has
modestly improved following enactment of the Fiscal Responsibility and Budget Management (FRBM)
framework. Like the central government, state governments, too, sought to reduce their fiscal
deficit/GDP in fiscal 2016. While the central government achieved its budgeted target of 3.9% (fiscal
deficit/GDP) in fiscal 2016, it remains to be seen if the states also achieve the fiscal target of 2.5% of
GDP.
By fiscal 2016, consumer price inflation nearly halved from the 10% recorded between fiscals 2008
and 2014. The government, together with the Reserve Bank of India (RBI), has initiated the process of
modernising central banking by adopting an explicit inflation targeting framework and setting up of
the Monetary Policy Committee. This will help engender a low and stable inflation regime.
A word of caution on food inflation, though. The government has managed to keep food inflation under
check in the two consecutive drought years through better management of foodgrains and restraint
in raising the minimum support prices paid to farmers. But the war on food inflation, with 40% weight
in the Consumer Price Index (CPI), cannot be won without addressing bottlenecks in agricultural
supply. Without a durable fix on food inflation, monetary policy will have a disinflationary bias and will
be constrained in supporting growth.
Between fiscals 2010 and 2012, the government’s fiscal deficit more than doubled to nearly 6% of GDP, led by scheduled payments because of Pay
Commission recommendations, expansion of the NREGA program (budget outgo rose 9% per year) and steep cuts in excise and customs duty. The RBI
was dovish and kept the repo rate below 5% for most of 2009, which led to rapid credit expansion. In the wake of Global Financial Crisis, the result was
that private consumption demand grew 8% on average during fiscals 2010 and 2011. But with supply failing to catch up, the increase in demand fuelled
inflation (consumer price inflation averaged 11% in these years) and bloated imports, which meant current account deficit rose to 4.8% of GDP
2
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Fiscal situation is improving gradually
Fiscal deficit (% of GDP) - Centre
Fiscal deficit (% of GDP) - States
6.5
Inflation is in the comfort zone
2015-16 BE
2.2
2014-15 RE
2.0
2013-14
2010-11
2009-10
3.5
1.9
2012-13
2.1
2016-17 BE
3.9
2015-16 RE
2014-15
4.1
2011-12
2.5
4.5
2013-14
2011-12
2010-11
2009-10
2012-13
4.9
4.8
2.9
2.9
5.7
Credit growth’s in line with nominal GDP growth
(%, y-o-y)
CPI inflation (%, y-o-y)
Nominal GDP growth
Credit growth
12.4
10.4
10.2
9.5
8.4
2016-17 F
2015-16
2014-15
2013-14
2012-13
2011-12
2016-17 F
2010-11
5.0
2009-10
4.9
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
6.0
Note: RE=Revised estimates, BE=Budget estimates
Source: Budget documents, RBI, CSO, CRISIL Research
B. There is no reliance on excessive leverage
India’s GDP growth is not supported by excessive credit creation, averaging 10.2% in the past two
years (fiscals 2015 and 2016), compared with 9.8% nominal GDP growth. In China, loans are flying
twice as fast, accompanied by ballooning debt/GDP.
C. It is accompanied by more repair and some reform
While the lack of majority in the Upper House has restrained the government from introducing bigbang reforms so far, it has taken a number of steps to repair/clean up the system. The two key repairoriented initiatives are cleansing the banking system off bad loans, and the UDAY (Ujwal Discom
Assurance Yojana) programme that rids banks off non-performing power sector loans, both of which
reflect this thrust. Mending bank balance sheets will restrict the ability of banking sector to support
growth in the short run, but will eventually ensure smooth flow of credit and spur growth.
The policy focus is also on designing a framework that will make public sector banks more
professional, efficient and competitive. The launch of ‘Indradhanush’, a plan to revamp the
functioning of public sector banks, will go a long way towards easing resources and channelling them
appropriately as the health of banks improves. Similarly, while UDAY will alleviate power sector loan
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distress and gradually bring down non-performing assets of banks, it will also improve the operational
efficiency of power distribution companies and make them viable.
Some key reforms (detailed later) have been nudged forward, which promise to raise India’s growth
potential over time. Steps taken by the Modi government since taking office have improved India’s
competitiveness and ease of doing business rankings. Efforts on this continued in 2015 as well and
we expect further improvement in India’s global rankings. In addition, the government has managed
to pass the Insolvency and Bankruptcy Code Bill, 2016, which strives to create an enabling
environment for expeditious resolution of bankruptcies with the least pain to all stakeholders. The
passage of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services)
Bill, 2016, by the Parliament was a shot in the arm for the government’s efforts to disburse targeted
subsides using the Aadhaar-based electronic format.
The mix of prudent monetary and fiscal policies, cleaning up of ecosystems, and moderate progress
on reforms will ensure a gradual improvement in India’s macroeconomic environment. The focus on
Digital India, which aims to connect people to government via technology and speed up financial
inclusion, could have a non-linear impact on the economy by heralding efficiency gains and hastening
inclusive growth. But the jury is still out on this and to be able to run a growth marathon, India will
need to materially fix its heath, education and infrastructure sectors.
An alternative approach to measuring quality of growth
An International Monetary Fund (IMF) paper 3 attempts to formally quantify quality of growth by computing
an index that measures the nature of growth (strength, volatility and sources) and its social dimension
(health and education outcomes). The framework is premised on the understanding that growth is
qualitatively better if it is stable, sustainable, one that increases productivity, and leads to socially
desirable outcomes that improve the standard of living and alleviates poverty.
Stability
(real per capita GDP growth)
Strength
(real GDP growth)
Growth fundamentals
Diversification of resources
Quality of growth
(Herfindahl-Hirschman index (HHI)
for value added of sectors)
Outward orientation
(Net external trade to GDP)
Health
(Infant mortality rate and Life
expectation at birth)
Social dimension
Education
(Average years of schooling and
school enrolment rate)
3
September 2014, Mlachila M., Tapsoba R. and Tapsoba S. J. A., “A Quality of Growth Index for Developing Countries: A Proposal”, IMF Working Paper
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We draw on this framework to look at how the quality of growth has trended over the last few years. The
results are represented in the form of a heat map below. The improvement is more significant on the
‘growth fundamentals’ pillar, supported by an increase and stability in GDP growth, increased
diversification of resources (visible from the Herfindahl-Hirschman Index for value added of sectors).
But we lag on the ‘social dimension’ pillar where, despite some improvements overtime, the standards are
far from what is required.
In the Indian context, there has been policy intent in the last two years to improve the quality of growth.
These efforts need to be relentlessly pursued to significantly raise productivity. And a lot more work needs
to be done in raising health and education standards. (See Box: Health and education need attention)
Growth fundamentals pillar
Mapping quality of growth using the IMF framework
FY91 to
FY00
FY01 to
FY03
FY04 to
FY12
FY13 to
FY14
FY15 to
FY16
Real per capita GDP growth (%, y-o-y)
3.7
2.3
6.6
4.8
6.1
Real GDP growth (%, y-o-y)
5.8
4.2
8.2
6.1
7.4
HHI of GDP by value added of sectors
(increase indicates reducing diversion)
0.12
0.11
0.10
0.11
0.10
Net external trade to GDP (%, y-o-y)
-2.67
-2.17
-4.98
-7.53
-2.36
Period averages
Improving socially, but still a long way to go
FY91 to
FY00
FY01 to
FY03
FY04 to
FY12
FY13 to
FY14
FY15 to
FY16
Preferred
metric / World
averages
Infant mortality rate
(per 1,000 live births)
78.51
64.20
52.02
41.75
38.60
26.01
Life expectancy rate
at birth (in years)
60.15
63.02
65.32
67.48
68.24
71.42
Average years of
schooling
3.05
3.65
4.05
4.32
4.43
11.83
Primary school
enrolment rate (Net)*
79.8
79.2
90.4
89.5
87.5
94.24
Education
pillar
Health
pillar
Social dimensions pillar
Period averages
Note:
*
Ratio is for period end, latest data available is for 2013 and for future years is estimated to rise at the same rate as in the preceding block. Total
number of new entrants in the last grade of primary education, regardless of age, expressed as percentage of the total population of the theoretical
entrance age to the last grade of primary.
1Millenium
2Average
Development Goal target by 2015
life expectancy at birth of the global population as per WHO
3
Millennium Development Goal target by 2015
4
Preferred enrolment rate for India as per UN Human Development Report
Real GDP data from fiscal 2013 onwards is as per the new base.
Source: CSO, World Bank, World Health Organisation, United Nations CRISIL Research
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Measuring the Modi government’s performance

India’s rankings on ease of doing business and competitiveness should rise in 2016 given government
moves to improve the business climate and pushes through moderate reforms

Institutions, infrastructure and financial market development are the front runners contributing to
improving competitiveness

But steps to raise efficiencies – in goods and labour markets, health and education and technological
readiness – are lacking
The Modi government wrapped up its second year in office, delivering a better macroeconomic position,
higher ease of doing business ranking, improved institutional capabilities, and a less fragile financial
system compared with 2014.
It is heartening to see some of the building blocks – so essential to growth in a factor-driven economy
such as India – falling in place. These will help improve productivity and efficiencies down the road.
This is reflected in sustained capital investment flows. In 2015, India was the largest recipient of foreign
direct investment (FDI; $59 billion) in Asia-Pacific.
Also, the state of the institutions has improved the most in the last two years, though according to a recent
survey by the World Economic Forum (WEF), corruption remains the biggest obstacle to doing business in
India.
However, many important areas are yet to see significant progress or reforms. These include indicators of
human capital such as health, education and labour market.
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What the Modi government has done to raise the bar
We take 2015 WEF rankings as our starting point and see where the government has made the most
progress in the past year. We analyse what these steps amount to in improving the economic potential. A
speedometer is used to signal the extent of the reform process.
Actions and implications
Speedometer key
Starting point: WEF Global Competitiveness Ranking 2015
Dark red: No action
Red: Identified problem/measures announced
Orange: Implementation started and initial steps taken
Yellow: Work in progress
Light green: Significant progress made
Dark green: Action completed
Note: measures considered between June 2015 and June 2016
Institutions
2015
2016
The state of institutions, both administrative and legal, has seen
significant progress. Headway needs to be made in implementation
Hits:
Misses:
Digitalisation and online
processing of various activities
such as obtaining industrial
licences and clearances

Corruption remains a
concern for investors

Uneven and distortionary
tax system

Further convergence of ministries

Judicial reforms

Bankruptcy Bill passed


Aadhaar Bill instated
Formalising the large
informal economy

Undisclosed foreign income and
assets Bill passed

Digital India platform for
maintaining records

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Infrastructure
2016
2015
Efforts to resolve infrastructure bottlenecks are underway. However,
implementation is only in the early stages
Hits
Misses

Increased investment in roads,
Pradhan Mantri Gram Sadak Yojana

Lack of reforms in telecom
sector

Progress in building of industrial
corridor

Tardy progress on land
acquisition Bill

e-NAM agriculture trading platform


Budgetary allocations for improving
irrigation
Slow movement on
agriculture infrastructure
reforms

UDAY programme for power sector

Atal Mission for Urban
transformation

PAHAL scheme for direct transfer of
LPG subsidy
Financial market development
2015
16
2016
The government has undertaken a number of reforms and made significant
progress, but obstacles remain
Hits
Misses

Indradhanush launched to streamline
and support public sector banks

RBI pushes clean-up of bank balance
sheets such as by tightening
provisioning norms for weak assets.

Adoption of marginal cost of fundsbased lending rate (MCLR) instead of
base rate for better transmission of
policy rates

Pradhan Mantri Jan-Dhan Yojana and
Pradhan Mantri Suraksha Bima
Yojana: 22.01 crore bank accounts
opened, 18.8 crore Rupay cards
issued, and 9.41 crore life insurance
policies issued.

Promoting creation of payments
banks for financial inclusion

Gold monetisation scheme

Infrastructure Debt Fund and the
National Investment and
Infrastructure Fund announced

Small savings schemes made marketlinked

Strengthening stressed asset
resolution and recovery mechanism
through CAP mechanisms and passing
the Bankruptcy Bill

Encouraging innovation and
strengthening institutional
framework for the bond
markets.
Macroeconomic environment
2016
2015
Steps taken to improve the macro economy, but long-term ones to
improve agriculture productivity and creation of employment remain
piecemeal
Hits
Misses

Fiscal consolidation continues

Steps to control inflation, such as
the Price Stabilisation Fund, a
strong stand on hoarding,
encouraging states to delist fruits
and vegetables from the APMC act,
managing minimum support prices,
food supply management through
imports

Monetary policy framework

Current account deficit remains low

India attracted largest FDI inflows
in Asia in 2015

Structural measures to
increase agricultural
productivity

Creating employment
opportunities
Efficiency of goods market
2016
2015
Some efforts to improve goods market efficiency announced, but major
reforms still lacking
Hits
Misses

FDI limit in insurance raised to
49%

No progress in passing the
GST Bill

Reforms in FDI policy in asset
reconstruction companies and
stock exchanges

Slow progress on
improving the food supply
chain

e-NAM agriculture trading market


100% FDI through FIPB route in
marketing of food products
produced and manufactured in
India
Removing distortions in
the subsidy regime

Need to take measures to
improve the
competitiveness of
exports as our RCA
(revealed comparative
advantage) vis-à-vis other
countries remains low

100% FDI in construction,
operation and maintenance of
some rail infrastructure, 100% in
port development

Ease of doing business improved
through reduction in number of
days to start business and number
of procedures required.
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Efficiency of labour market
2016
2015
Reforms in the labour market are in initial stages and job creation is yet
to gather pace
Hits
Misses

Shram Suvidha portal (labour
identification)

Revamped Rashtriya Swasthya
Bima Yojana – smart cards for
unorganised sector

Deen Dayal Antyodaya Yojana to
reduce urban poverty through
skill development and training

Allocation to MNREGA for
productive works

Skill India: 56 lakh people
benefitted as of March 2016

India’s first National Policy for
Skill Development and
Entrepreneurship 2015 created to
rejuvenate India’s skill ecosystem

Central Government
passed on land and labour
reforms to the states, but
majority of the states have
not undertaken significant
reform measures to
improve labour market
conditions.
Health and education
Little progress made in improving healthcare and primary education
2016
Hits
Women and child development
programme

Beti Bacho programme
announced
2015

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Misses


Limited funds allocated to
these programmes in the
budget

Spending on health and
education sector
accounted for 1% of GDP
in 2015-16 Budget
(centre).

Health and education
outcomes
36 centres for women health
installed
Technological readiness
Plans announced on technological readiness have been forthcoming and
have seen sharper focus from the government
2016
Hits

2015
Misses
Digital India programme, including
e-education, e-health, e-sign,
MyGov app, online registration
system, full number portability,
Electronics Development Fund,
and schemes for digital literacy in
rural India, launched

Adoption of Aadhaar ID system for
social welfare
programmes/subsidy disbursal

Jan-dhan-Aadhaar-Mobile (JAM)
trinity

Internet access remains a
challenge in the rural
areas

Technological readiness
infrastructure remains
lacking

Aadhaar grossly
underpenetrated in north
eastern part of India
Measuring reforms
For long-term well-being, a country needs to raise its ability to grow faster without creating inflationary
pressure – in effect, to improve its potential growth.
We have used the WEF rankings and methodology rooted in Michael Porter’s Growth Theory (1990) on the
stages of development and benchmark India’s growth potential/ competitiveness versus competitors. The
Indian economy is still in the factor-driven stage – and needs to transit from agriculture to manufacturing.
The share of the manufacturing sector has stagnated at 15-17% for the past decade. To achieve stable
growth and go up the value chain, India needs to focus on improving its competitiveness.
WEF’s Global Competitiveness Index shows that after five years of decline, India's ranking improved by 16
places to 55th in 2015. The quality of institutions has improved (ranked 60, up 10 places) after structural
changes were made to the bureaucratic system, the reduction in red tape, and the shift to online
processing of various activities such as obtaining industrial licences and environmental clearances.
After 5 years of decline, India’s WEF rankings improve
WEF ranking
70
81
121 120
112 103
51 53
2014
Technological
readiness
Institutions
Health and primary
education
Macro-economic
environment
60
95 91
financial market
development
84
92
Labour market
efficiency
98
Goods market
efficiency
91
Infrastructure
101
2015
Source: WEF 2015, CRISIL Research
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Another area where India has seen improvement is in macroeconomic stability ranking (at 91 in 2015). This
is thanks to lower global commodity prices and supportive government policies – in particular, fiscal
consolidation and inflation control through food supply management and inflation targeting framework
adopted by the Reserve Bank of India.
How India compares on WEF ranking, 2015
Factor driven
Efficiency driven
Innovation driven
GCI
India
China
Indonesia
Overall
80
28
49
Institutions
60
51
55
Infrastructure
81
39
62
Macroeconomic environment
91
8
33
Health and primary education
84
44
80
Overall
58
32
46
Higher education and training
90
68
65
Goods market efficiency
91
58
55
Labour market efficiency
103
37
115
Financial market development
53
54
49
Technological readiness
120
74
85
Market size
3
1
10
Overall
46
34
33
Business sophistication
52
38
36
Innovation
42
31
30
Overall
55
28
37
Source: WEF 2015, CRISIL Research
These developments are in line with our analysis of the performance of the Modi government in its first
year (Modified Expectations, May 2015). We extend our analysis this year to measure improvements
across the various pillars stated in the WEF rankings in the second year of the government and highlight
the focus areas going ahead.
Our assessment shows that the Modi government has made good progress by putting in place some
crucial building blocks such as institutions, infrastructure and financial market development. However,
little progress is seen on increasing labour and goods market efficiency, and health and education.
Reforms to improve the competitiveness of the Indian economy are crucial at this juncture. Among its top
10 export items, India does not enjoy competitive advantage in three and has seen competitiveness
decline in three others as per the RCA, or revealed comparative advantage, measure (Annexure 2).
Another challenge for the government is to improve technological infrastructure to benefit fully from the
initiatives under the Digital India campaign. India ranks poorly in terms of technological readiness
(Page 20).
20
States, the second wheel in the reform process
States account for two-thirds of public expenditure in India, and also have greater jurisdiction in areas
such as the labour and goods markets. Therefore, reforms undertaken at the state level are crucial.
In the last two years, initial labour reforms have been undertaken by Rajasthan, Madhya Pradesh, Gujarat
and Andhra Pradesh. Most states have adopted online mechanisms for clearances, tracking and filing of
licences and registrations, and payment of taxes such as value-added tax and central sales tax. In
addition, single-window mechanisms to provide information on procedures, checklists and timelines
across government departments have been instated across many states.
The reform process remains skewed and concentrated in a few states for now. With increasing fiscal space
for the states to spend, the state governments need to focus on bridging gaps in their labour policies and
infrastructure, among other things.
Towards this initiative, the government has also started assessing the performance of states in
implementation of business reforms. It has drafted a Business Reform Action Plan for the states with 360
action points to improve the ease of doing business. As per the last state assessment report (September
2015), leading the way in the reform process were Gujarat, Andhra Pradesh, Jharkhand, Chhattisgarh,
Madhya Pradesh and Rajasthan, while the laggards included North Eastern states such as Sikkim and
Meghalaya, and Jammu and Kashmir.
The next big step: network readiness
Under the Digital India programme, the government has taken a number of significant steps for using
technology to increase financial inclusion and improve efficiency in government operations, among other
things (see next chapter).
However, technological infrastructure in India remains poor and needs attention. The country’s ranking
on the WEF Network Readiness Index has been falling since 2012. At 91st (among 139 countries) in 2016,
it was down six places – the lowest ranking for any BRICS country. In the neighbourhood, China (59th),
Sri Lanka (63rd) and Thailand (62nd) were all ranked higher.
The plethora of existing and proposed Digital India initiatives under the superstructure of Digital India
rests on the base of internet connectivity. Unfortunately, this infrastructure is yet to come up to speed.
The Modi government, through the National Optical Fibre Network Programme, aims to provide internet
connectivity to all 250,000 gram panchayats by December 2016. However, as on May 4, 2016, only 6,753
gram panchayats (0.3%) have been connected live on the network.
A recent report by the renowned Mary Meeker of the Silicon Valley venture capital firm Kleiner Perkins
Caulfield Byers, called Internet Trends 2016 - Code Conference, June 2016, showed that despite having
the second-largest internet user base in the world, India has an internet penetration of only 22%.
According to the UN Human Development Index 2015 report, if India had similar internet access levels as
the developed countries, it could result in creation of 65 million additional jobs in the country.
21
Technological readiness
Network Readiness Index 2016 (rank among 139 countries)
Overall
91
Environment Index
99
Political and regulatory environment
78
Business and innovation environment
110
Readiness Index
88
Infrastructure
114
Affordability
8
Skills
101
Usage Index
103
Individual usage
120
Business usage
75
Government usage
59
Impact Index
73
Economic impact
80
Social Impact
69
Source: GITR 2016, CRISIL Research
In digital technology, India has lagged in terms of the impact of adoption due to the divide in human
capabilities. Despite a vibrant IT industry, the job opportunities created in this sector account for less
than 1% of total employment in the country. The impact of the technological revolution is creating a skillbiased change – with new technologies reducing demand for low-skilled workers and increasing it for
high-skilled workers (HDI, 2015).
Going ahead, a focus area for the government would be to build technology infrastructure and the
necessary skills for it. This will help push up productivity and efficiency across sectors such as agriculture
and manufacturing. In addition, it will boost supply of basic services in rural areas and support financial
and social inclusion across income classes.
22
Health and education need attention
The government will need to focus more on one of the most critical building blocks for India – health
and education. Spending on health and education has remained stagnant at 1% of GDP since fiscal
2015.
East Asia has made significant progress in health and education in the last two decades, which have
contributed to improving the standards of living in these countries. The greatest decline in under
nutrition has occurred in East Asia with the prevalence of stunting declining from 42% in 1990 to 12%
in 2011. This was led by improvements majorly in China. The ratio of people living in poverty has fallen
from 60% in 1990 to 13% in 2008 in China. High growth performance in China in the last two decades
has been supported by rising years of schooling and improving health outcomes such as declining
infant mortality rates and increase in life expectancy.
The long-term goals for improving the standard of living in India include better education and health
to raise productivity and employability, better governance, reducing corruption and more equal
distribution of income in the economy. Health indicators warrant particular attention – life
expectancy is 68 years compared with 75 years in China and there are only 7 physicians per 10,000
people compared with 14.6 in China, 24.5 in the US and nearly 38 in Germany. As for years of
schooling, the mean in India is 5.4 years compared with 7.5 in China, 10.8 in Sri Lanka, 7.6 in Indonesia
and 10 in Malaysia. Also, the quality of education needs improvement with focus on better studentteacher ratios, performance of students, and training for teachers.
23
Can Digital India lead to a developed India?

The government’s digital agenda aims to achieve a diverse set of goals, ranging from financial
inclusion and provision of health and education services to improving efficiency in governance and
functioning of markets.

The potential of technology is enormous, some of it unimaginable. To realise this potential, the
government needs to plug the gaps in basic digital infrastructure, which in India’s case is internet
penetration and electricity access.

To address challenges of poverty and underdevelopment in a balanced and sustainable way, a set of
broad policy efforts – education, health, infrastructure, and initiatives to create livelihood
opportunities – are also needed.
Digital reforms, the latest addition to the policy toolkit, are considered critical for speeding up economic
development. The Modi government has been quick to board the technology bandwagon with its 'Digital
India’ programme, which aims to speed up financial inclusion and deliver government services
electronically by increasing internet connectivity and improving online infrastructure.
Though not a panacea for the Indian economy, technology-based solutions do allow us to leapfrog over
some constraints imposed by lack of physical infrastructure. For instance, over the last decade, India
overcame a massive deficit in connectivity spawned by the constraints of fixed-line phones, by pushing
mobile telephony, as did many other emerging/developing economies. The rapid spread of connectivity
that followed would have otherwise taken many decades through fixed lines.
This also has the potential to enhance capacities of each type of agent in the economy – the citizens, the
government, and the private sector. For citizens, digital infrastructure can provide increased and
equitable access to a variety of opportunities – that too till the last mile. For the government, digital
infrastructure can provide greater efficiency over the traditional modes to deliver services – through
24
better targeting and reduced leakages. For the private sector, digitalisation of regulatory requirements
can provide greater ease in doing business, and digital platform can provide scope for new innovations,
and new types of businesses (online taxi aggregators, cloud-service providers, to name a few).
But how capable is the digitalisation programme of achieving these development goals? Can we bank on
Digital India to fill the void in economic development left by the slow pace of structural reforms? If yes,
how close is the Modi government to achieving it?
Annexure 1 lists progress on key initiatives under digitalisation taken by the Modi government their
potential.
Three potential disruptors
Aadhaar identification
Aadhaar is a massive identification programme of Indian citizens, which seeks to simplify yet strengthen the
authentication process in India. It is a unique 12-digit identification number assigned to an individual based on
her demographic and biometric information. Unlike the earlier practice of having eligibility-based identity cards,
Aadhaar can be used for multiple government and private services.
The rapid pace of issuance of unique identities to Indian citizens under Aadhaar is making the government’s job
much easier in reaching the intended beneficiaries. Around 1 billion Aadhaar cards have been issued till date.
Likewise, the acceptance of a single Aadhaar card for multiple government schemes is creating strong
acceptability for the card among Indian citizens. This way, the Aadhaar-enabled digital platform is creating strong
network effects in the economy. The mutual acceptance of the platform among government and citizens has
enhanced the potential of the platform to address various spheres of the economic development.
Popularity of mobile phones
Mobile phones already have huge demand and popularity among Indian citizens. The number of mobile subscribers
in India crossed the 1 billion mark in 2015. Teledensity is higher in urban than in rural areas. But the gap is bridging
– the growth rate of mobile subscriptions and teledensity4 has been much higher in rural areas than urban areas
in 2015. The year-on-year growth in number of wireless subscribers in March 2016 was 7.4% in rural areas, versus
5.9% in urban areas. While the teledensity growth rate was 3.9% in urban areas, it was 6.5% in rural areas. The
total number of broadband subscribers as on March 2016 stand at 132.77 million – an increase of 58.7% compared
with the same month the previous year.
A massive reduction in cost of mobile handsets as well as data connections has caused this broad-based uptake
in usage of mobile phones. The widespread user base of mobile phones offers tremendous scope for delivery of
mobile-based services by both public and private sector.
Unified Payment Interface
The ever evolving payments ecosystem in India is significantly helping ease digital transactions in India.
In April 2016, the National Payments Corporation of India (NPCI) launched the Unified Payment Interface (UPI),
which will allow customers to instantaneously transfer funds across different sources/banks with the use of a
single identifier, which can be as simple as a mobile phone number or Aadhaar number. If one juxtaposes this with
the widespread popularity of mobile phones and acceptability of Aadhaar platform, it implies that UPI will provide
a big fillip to digital transactions. This will help in moving towards a cashless economy.
The big simplification in UPI over the earlier IMPS5 platform also has the potential to increase acceptability of
formal banking among poor and unbanked population. This also has a lot of scope for the domestic remittance
market.
4
5
Tele-density is defined as number of telephone connections per 100 individuals in a defined area.
Immediate Payment Service
25
Where digitalisation can make a difference
Crossing the initial hurdles of financial inclusion
India now has over a billion mobile connections and a similar number of people have been biometrically
registered through Aadhaar. In addition, almost 220 million households now have bank accounts under
‘Jan-Dhan'.
While there are 638,596 villages in India, bank branches have only grown to about 50,000 as of 2015. The
high cost of building brick-and-mortar branches and maintaining low-balance accounts made it unviable
for banks to reach remote areas. Since a large part of India cannot be serviced through the traditional
bank branches, the convergence of mobile connections, Aadhaar identification process and bank
accounts provides an unprecedented opportunity to bring large swathes of unbanked population under
the ambit of formal finance.
The Jan-Dhan-Aadhaar-Mobile (JAM) Trinity – a term coined by India’s Chief Economic Advisor Arvind
Subramanian – allows banks to bypass the traditional infrastructure required around banking by using
mobile phones and point-of-sale devices. Point-of-sale devices have enabled third-party agents (called
banking correspondents) to perform digital banking on behalf of banks, significantly reducing the cost of
furthering financial inclusion.
A similar model has already been tested in Kenya, with huge success. Kenya’s M-PESA mobile payments
system reduced the cost of sending remittances by up to 90%, and advanced financial inclusion efforts
by reaching 80% of households within four years 6 . As per government data, 220.1 million Jan-Dhan
accounts had been opened till May 2016, amounting to approximately 88.9% of Indian households 7. This
holds tremendous potential for furthering the financial inclusion agenda of the government.
Earlier, penetration of formal banking was also hindered by the cumbersome process of filling many forms
in order to open a bank account. With the acceptance of Aadhaar for authentication and as a valid e-KYC
document, banking has now been simplified, especially for the poor and illiterate population. The rollout
of social security schemes through digital payments is also popularising formal banking among the
previously unbanked population. Since the launch of Jan Suraksha insurance and pension schemes, the
proportion of dormant accounts has fallen – from 53.6% in May 2015 to 25.6% in May 2016.
6
7
World Development Report (2016). Digital Dividends, a World Bank publication.
Source: a) Number of bank accounts: pmjdy.gov.in; b) Number of households: Census 2011 data. Assumption used: one bank account per household
26
Rapid increase in Jan-Dhan accounts
Fall in ‘zero balance’ accounts
Million
%
250
Launch of
Jan-Dhan
programme
200
204.7
185.4
80
220.1
67.3
53.6
60
158.6
150
76.8
40.3
125.5
40
31.0
100
53.8
20
50
0
Aug-14 Sep-14
25.6
Jan-15 May-15 Sep-15
0
Jan-16 May-16
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Poorer states generally benefit more from Jan-Dhan accounts
Number of accounts
opened per household
2.0
1.5
1.0
0.5
0.0
0
50,000
100,000
150,000
200,000
250,000
300,000
State's per capita NSDP
Source: pmjdy.gov.in, Ministry of Statistics and Programme Implementation
Need to reach out to those who need the most
A greater proportion of the incremental Jan-Dhan accounts have been opened in relatively poorer states
such as Uttar Pradesh, Bihar and Madhya Pradesh. However, some parts of the country, particularly the
north-eastern states, are still at risk of getting left out of the digital story. According to the Economic
Survey, 2016, these states rank the lowest in Aadhaar coverage. In January 2016, penetration rates in
Assam and Meghalaya were at an alarming low of 2.1% and 2.9%, respectively. Little has changed since
then. As on April 30, the bottom five states remained the same. Aadhaar coverage in the lowest-ranked
Assam had only increased 1.4% between January and April 2016.
The bottom 5 in Aadhaar coverage
State
Number of Aadhaar assigned as a percentage of total population
Jan 16
Apr 16
Assam
2.1%
3.5%
Meghalaya
2.9%
4.0%
Mizoram
38.0%
40.1%
Nagaland
48.9%
50.0%
Arunachal Pradesh
51.2%
57.8%
Source: Economic Survey of India, 2016; UIDAI
27
The objective of using digitalisation for advancing financial inclusion is that a fully functional digital
infrastructure can help in seamless delivery of services to the end user. India cannot achieve this goal if
the remote areas – which need access to services the most – are left out of the digital infrastructure. If
the government wants to realise the potential of inclusive development that digitalisation can provide, the
remote areas must be given top priority in programme implementation. Efforts should be intensified to
improve the penetration of 'Aadhaar' in underdeveloped parts of the country, particularly the northeastern states.
Improving governance
The digital infrastructure can be used for two kinds of government transfers: cash transfer (directly into
the beneficiary’s account through a digital transaction) or transfer of a physical item (using Aadhaarbased digital authentication). In both cases, digital authentication ensures that benefits reach the
intended beneficiaries with minimum human interference.
The accurate targeting provided by digital authentication can be especially empowering for women. In
Niger, for example, it has been seen that mobile transfers to women recipients have given them greater
authority in household decision making8.
Transfer of cash subsidies as digital payments provides additional advantages such as allowing tracking
of funds, increasing the speed of payments, and saving government time in fund management.
The government is also using the Aadhaar-enabled digital authentication to give incentives for a defined
section of population. By linking benefits to the unique identity, the government can provide incentives to
encourage female participation in the labour market, and children to choose education over work, etc.
These kinds of targeted incentives have worked very well for Brazil through its Bolsa Família programme
of conditional cash transfers through electronic payment cards. The programme not only reduced poverty
in Brazil from 9.7% to 4.3%9, but also reduced the costs of social transfers from 15% to under 3% of total
payments using the electronic medium10.
The passage of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services)
Bill, 2016, by Parliament was a shot in the arm for the government’s efforts to disburse targeted subsides
using the Aadhaar identification process. By transferring MNREGA wages and cooking gas and kerosene
subsides digitally, the government can target beneficiaries efficiently and hence save money lost due to
leakages. According to the government, since the introduction of DBT, the Public Distribution System has
seen deletion of 16 million bogus ration cards, giving savings of about Rs. 100 billion, and the subsidy on
Liquefied Petroleum Gas (LPG) has seen deletion of 35 million duplicate beneficiaries, resulting in savings
of over Rs 140 billion.
World Development Report (2016). Digital Dividends, a World Bank publication
How to Reduce Poverty: A New Lesson from Brazil for the World, a 2014 publication from World Bank
10 World Development Report (2016). Digital Dividends, a World Bank publication
8
9
28
Improving market functioning
A unique feature of the internet is that it is an open platform for storage and dissemination of information.
This can be widely used for reducing information asymmetry in various markets.
A host of relevant information on agriculture, job vacancies and government schemes, etc. can be
provided on mobiles online and offline, which goes a long way in enabling people to make better decisions.
Moreover, the transparent nature of electronic trading can help facilitate efficient price discovery in the
market. The agriculture market in particular, suffers from a lack of it.
The launch of e-NAM, an online trading platform for agricultural commodities, is a welcome step in this
regard. It will facilitate efficient price discovery and also bring farmers closer to trading directly in a single
national market. However, successful implementation of the programme depends on streamlining of laws
and quality standards across states. As agriculture economist Ashok Gulati has observed, many states
levy taxes on trading of agriculture produce, which they might not want to forego since they comprise an
important chunk of their revenues. The e-NAM platform also needs to provide for settlement of disputes
arising out of quality standards of farm produce traded on the platform. Ajay Jakhar, chairman of Bharat
Krishak Samaj, has also voiced this concern, saying the lack of uniform rules, including the need to define
the permissible level of moisture content, can obstruct trading with litigation issues.
But there are caveats
The Modi government has recognised the importance of digital reforms in good time. Significant strides
have been made in expanding the digital banking infrastructure under the Jan-Dhan programme. The
roadmap has been laid, but how soon will India be able to reach the target? How soon will people of all
classes and communities be connected to the India growth story? There are no clear answers yet.
The ability of Digital India to achieve its goals depends on increasing the penetration of internet across
the economy. As the previous chapter and the annexure 1 show, this essential requirement is where the
government’s programme is lacking momentum.
If the Modi government wants to achieve the full scale of development goals envisioned in the ambitious
Digital India programme, it needs to go back to the basics. The focus this year should be on developing
internet infrastructure and making it affordable for the citizens – and ensuring that everybody has access
to power.
Even though technology can impact a wide range of development goals ranging from financial access to
improving the functioning of markets, it cannot serve as a panacea for all the problems in the economy.
Technology reforms should be considered complementary to structural reforms. Their role is that of a
critical enabler which holds a big promise for enhancing the efficiency and speed of development.
Digitalisation will create an efficiency-led spurt in growth over the medium run. But to run a growth
marathon and also simultaneously address challenges of poverty and under-development in a balanced
and sustainable way, there is a need to amplify efforts – in education, healthcare and infrastructure – and
to take initiative to create livelihood opportunities.
Only then can we leapfrog out of poverty and underdevelopment with the aid of technology.
29
What does all this mean for fiscal 2017?
The swing factor this fiscal, however, will be a good monsoon – coming after three consecutive weather
shocks (two bad monsoons and a spell of unseasonal downpour in early 2015). If the rains are normal, it
would give agriculture a one-time growth kicker, particularly given the low-base effect of the two previous
years. That should lift sagging rural demand, and by extension, overall GDP growth.
We expect GDP to grow 7.9% in fiscal 2017 compared with 7.6% in fiscal 2016, provided monsoon is normal
and the global situation does not deteriorate from here. The International Monetary Fund (IMF), the World
Bank and the Organisation for Economic Co-operation and Development (OECD) have already lowered
their global growth forecasts for 2016 by 20, 50 and 30 basis points (bps), respectively. So far, the Indian
economy’s modest recovery has been shaped by good luck on crude oil and commodities, and a supportive
domestic policy environment.
Consumer price inflation (CPI), we believe, will stay soft at 5%, though a tad higher than 4.9% in fiscal
2016. Although oil and commodity prices have nosed up of late, a normal monsoon augurs well for food
prices and should cap upside to inflation from higher salaries and pensions, and an expected push to rural
incomes.
Accordingly, we expect the Reserve Bank of India (RBI) to continue its accommodative monetary stance
and cut the repo rate by another 25 bps this fiscal. The yield on the 10-year benchmark government
security, we believe, will ease to 7.3% by March 31, 2017, from 7.5% as of March 31, 2016. This would be
supported by the government’s focus on fiscal consolidation and the RBI’s efforts to manage liquidity
conditions for better transmission of reduction in policy rate to other market-determined interest rates.
As for current account deficit (CAD), we expect a mild upward pressure because imports are likely to
increase largely on a revival in consumption. Exports, in contrast, are expected to stay in the bog. The
upshot is that we see CAD inching up to 1.3% of GDP this fiscal from 1.1% in fiscal 2016.
But, a faster-than-expected pace of hikes by the US Federal Reserve could cause capital outflows from
emerging markets, including India, and weaken the rupee. So while this fiscal will be closely watched for
progress of policy actions already announced, the ability of the government to unleash bigger reforms is
likely to diminish due to political compulsions thereafter.
CRISIL’s projections
FY14
FY15
FY16
FY17F
GDP (%)
6.9
7.3
7.6*
7.9
CPI (%, average)
9.2
6.0
4.9
5.0
CAD (% GDP)
1.7
1.3
1.1
1.3
Fiscal deficit (% GDP)
4.4
4.1
3.9
3.5**
60.1
62.6
66.3
66.5
8.8
7.7
7.5
7.3
Rs-$ exchange rate (March-end)
G-sec yield (%, March-end)
*CSO advance estimate, **Budget estimate, F=Forecast
Source: CSO, RBI, Budget documents, Ministry of Finance, CRISIL Research
30
Going forward, the medium term outlook will be shaped by progress on initiatives such as cleaning up of
bank balance sheets, successful implementation of the Goods & Services Tax (after legislation), the
Insolvency & Bankruptcy Code, financial inclusion through initiatives like the Jan-Dhan and Digitalisation,
which can potentially have a transformative impact on economic growth in India. However, without
addressing core physical infrastructure issues such as seamless availability of electricity and creation of
road network, and social infrastructure issues such as health and education, sustaining any growth kickup can be a challenge.
…but the pace remains constrained
A number of factors continue to constrain the speed of recovery in the economy. We list some significant
ones:
Constraints to the speed of recovery
2014




2015
2016
Limited scope to use countercyclical policy tools
-
Difficulty in cutting interest rates (Legacy of high inflation)
-
Limits to fiscal stimulus (high debt and deficit)
Sluggish investment cycle
-
Time to replenish project pipeline
-
Underutilised capacities due to sluggish demand
-
Balance sheet leverage of infrastructure companies
Global factors
-
Growth in export destinations
-
Trade intensity of global growth
-
Oil and commodity prices
Banking sector’s limited ability to finance growth
-
Bad assets in banking sector
Source: CRISIL Research
31
A. Scope for counter-cyclical policy tools limited
Efforts to contain fiscal deficit and inflation have limited the government’s ability to use
countercyclical policy tools for boosting the economy. The situation is getting better, particularly on
the inflation front. Fiscal deficit, too, has been reined in, led by restrained government spending over
the past two years. But on the flipside, this restricts the government’s ability to spend on investments.
Similarly, given underlying pressures from inflation, the central bank is unable to slash policy rates to
spur demand.
B. Investment cycle remains sluggish
Revival of private investment will be a slow process and is likely only towards the end of the current
fiscal. The Modi government has made efforts to improve the business environment and this year’s
budget takes it forward by strengthening public private partnership (PPP) through dispute resolution
mechanism and provision for renegotiation of these contracts. This will work towards de-risking
private participation in infrastructure. The positive spillover of balanced risk-sharing between public
and private sector has already been experienced in the road sector.
Weak demand – both external and domestic – leading to low capacity utilisation is the key deterrent
to fresh private investment, particularly in the manufacturing sector. External demand is outside
India’s control and the Union Budget, by sticking to fiscal consolidation, does not pump-prime the
economy. Corporate debt and leverage are sticky issues and will take time to resolve. The freshly
minted bankruptcy and insolvency law will only gradually allow early resolution these issues.
As a result, we foresee only a moderate pick-up in investments overall, with activity limited to a few
pockets – roads, telecom, oil refining, renewable energy, power transmission and distribution,
fertilisers and coal mining.
C. Global developments a mixed bag
Recent global developments have had a mixed impact on India. While lower crude oil and commodity
prices have helped rein in fiscal and current-account deficits and inflation, slack global growth and
falling intensity of trade (trade/GDP) have hurt India's exports (see Annexure 2).
D. Mounting bad assets constrain banks
Large amounts of bad loans in the books of Indian banks impair their ability to aggressively finance
growth. Bank credit growth has been languishing below 10% for nearly two years now and we don't
foresee a significant improvement anytime soon given the large share of stressed assets plaguing the
sector, weak growth in demand, and slow deleveraging in stressed sectors such as infrastructure,
construction, steel, and power. CRISIL estimates the gross NPA of the Indian banking system to rise
to 7.7% of total loans by March 31, 2017, from about 6.8% as of March 31, 2016.
32
Annexures
1: The wings of digitalisation and how far the government has spread them
Steps taken
Internet
connectivity

Unique

Identification
/ Aadhaar
Aim: to bring all
250,000
panchayats under
National Optical
Fibre Network by
December 2016.
Progress

As on 4th May 2016, only
6,753 gram panchayats
(0.3%) connected live on
the network

According to venture
capitalist Mary Meeker,
internet penetration in
Indian market is currently
only 22%

However, the internet
usage base in India is
growing fastest in the
world (44% y-o-y growth
in 2015, while world
growth stagnates at 9%)

India now has 277 million
internet users, surpassing
US to become the secondlargest internet user base
after China
Continued support 
by the Modi
government for the
identification
programme
Potential

Number of Aadhaar cards 
issued have increased
from about 700 million in
2014 when Modi took over

to 1.01 billion in 2016

Aadhaar identification
now covers about 93% of
the Indian population

Aadhaar cards were
issued in 2015 at a rate of
4 million cards per week
in 2015

Seamless connectivity is the
foundation on which the potential of
digital transformation rests, but India
lags in this critical/core
infrastructure
Authentication can be used for
provision of both government and
private services
Authentication is simple enough for
the illiterate population – enabling
greater access to government
benefits and digital payments
The public as well as private sector
can leverage the widespread reach of
Aadhaar to reach out to larger
sections of population, thereby
increasing the scale of impact
33
Steps taken
Financial
inclusion
Payments
ecosystem

Launch of
payments banks
and small finance
banks

Provision of low
cost insurance and
pension schemes
through digital
platform

Launch of Micro
Unit Development
and Refinance
Agency (MUDRA)
to provide loans to
small and
vulnerable
businesses

11
Jan-Dhan

programme, which
aims to provide at
least one bank

account for every
Indian household,
remained a priority 
in both years


Progress
Launched a new

payments
platform for digital
payments, the
Unified Payment
Interface (UPI), in

April, 2016
Withdrew
surcharges,
service charges
and convenience
fees on cards and
digital payments
that are currently
imposed by
various
government
departments

220.1 million Jan-Dhan

bank accounts opened till
May 31, 2016

45.74% of these accounts
are Aadhaar-seeded
Number of dormant
accounts has significantly 
gone down from 55.8% in
April 2015 to 26% in April
2016
The total number of
digital transactions in
2015-16 were 4.37 billion
– up 93% from the
previous year
Increased speed of financial inclusion
efforts possible due to digitalisation
Aadhaar’s simple authentication +
validity of Aadhaar as e-KYC can go a
long way in connecting the poor to
formal finance
Digital payments can ensure
availability of timely credit at
reasonable rates for the poor,
reducing dependence of Indian
households on physical savings such
as gold, cash, etc

For the banks, the banking
correspondents offer significant
reduction in costs compared with the
brick-and-mortar model for servicing
remote and sparsely populated
regions

Pushing social security benefits
through the digital route can also help
reach workers in informal sector,
which employs 93% of labour force in
India

UPI, a revolutionary platform
significantly simplifying digital
payments

Potential to usher huge popularity for
digital transactions even among the
poor and illiterate population.
Value of payments in
fiscal 2016 stood at Rs

796.82 trillion – up 14%
from the previous year
and 28% since fiscal 2014 
According to the
government, in fiscal
2016, over Rs 610 billion

($9.16 billion) was
electronically transferred
to over 300 million
beneficiaries under Direct
Benefit Transfer (DBT)

scheme. This includes
over Rs 250 billion ($3.75
billion) in MGNREGS11,
and over Rs 210 billion
($3.15 billion) in liquefied
petroleum gas (LPG)
subsidy.
Mahatma Gandhi National Rural Employment Guarantee Scheme
34
Potential
Potential to spur digital payments in
domestic remittances market.
Increasing acceptability of
digitalising payments will help in
becoming a cashless economy
Digital payments will ensure the
viability of servicing low-balance
accounts, especially for the new lowscale banks such as payments banks
and small finance banks
Digital payments can help track
payments –the money trail can be
used to ensure greater tax
compliance
Steps taken
Government
transfers



Following
schemes were
added under DBT
cash transfers:
a.
LPG subsidy
b.
Kerosene
subsidy
c.
Wages to
MGNREGS
workers
d.
Fertiliser
subsidy (on a
pilot basis)
Progress

a.
b.
Approval from
Supreme Court for
voluntary use of
Aadhaar in welfare
schemes
Aadhaar Bill
passed by both
houses of
Parliament. The
Bill recognises by
law the use of
Aadhaar for
transfer of
subsidies directly
into bank
accounts of
beneficiaries
According to PMO, DBT
scheme has resulted in:
c.

Potential

deletion of 16 million 
bogus ration cards,
giving savings of

approximately Rs 100
billion ($1.5 billion) in
PDS

deletion of 35 million
- duplicate
beneficiaries in LPG
subsidy, resulting in
savings of over Rs 140
billion ($2.1 billion) in 
2014-15
Rs 30 billion ($450
million) in MGNREGS
(about 10% of
expenditure) saved in
2015-16 due to
Aadhaar-enabled
cash transfer
However, full rollout of
food and fertiliser subsidy
through DBT is yet to take 
place. These schemes
have some of the highest
proportion of leakages
among subsidies.
Moreover, a large
proportion of fertiliser
subsidy is actually
misused by industries,
and even exported to
neighbouring countries
Biometric authentication ensures
accurate targeting of beneficiaries
Digital payments ensure tracking of
transfers till the last mile
Digital payments provide a real time
transfer to the beneficiary – ensuring
timely provision of benefits
Biometrically authenticated digital
payments minimise the need for
middlemen, reducing the scope of
leakages and diversion to black
markets
Massive fiscal savings: According to
2016 Economic Survey, DBT can save
the following proportion of current
subsidy amount:
a.
Food: 69% (54% in wheat, 15% in
rice)
b.
Kerosene: 46%
c.
Fertiliser: 40%
d.
LPG: 24%
Through unique and easy
identification of Aadhaar, speedy
conditional cash transfers can be
provided, incentivising people to take
optimal decisions (e.g., cash transfer
to the household if family sends girl
child to school)
35
Steps taken
Health and
education


Digitisation
for creating
markets
efficiency
gains
36
Progress
Digital India has e- 
health initiatives
such as online
medical
consultation,
maintenance of
health records in
digital locker,
getting online
appointment
through Aadhaar,
etc
Not much progress
E-education under
Digital India
programme
envisages:
a.
Internet
connectivity in
all schools
b.
develop pilot
Massive
Online Open
Courses

Digital literacy
scheme aimed to
cover 6 crore rural
households within
3 years

e-NAM: e-trading
platform for
agricultural
produce launched

Digitisation of land
records

Digitisation of
documents for
SME registration,
environmental
clearances, etc

e-NAM has currently
launched on a pilot basis.
Full rollout depends on
the states to delist
commodities from their
respective APMC Acts
Potential

Online diagnosis can help patients in
remote areas connect to doctors,
enabling timely delivery of at least
basic health services

With India expecting to have the
largest young population in the world
for the next 20-30 years, the demand
for education is going to remain high

Nurturing human capital according to
employment needs will help realise
demographic dividend

With free online platforms like
YouTube that have no regional
boundaries, e-education will be able
to increase access and quality of
education at the same time –
something that was not possible
earlier

Digitisation of paperwork will improve
ease of doing business for both
domestic and international players in
the Indian industry

Online trading of agricultural produce
will facilitate efficient price
discovery, reduce the need for
middlemen, increasing remuneration
for the producing farmer
2: External environment a mixed bag for India
The Modi government’s tenure so far has coincided with an uneven and fragile global growth recovery.
After recording 3.4% in 2014 – the year it came to power – world GDP growth has struggled to hold the 3%
mark in the subsequent two years. World trade growth, too, has remained anaemic during this period. In
fact, with a sustained softness in global demand conditions, there seems to be a structural change in the
trade intensity of growth, which is now below world growth, a phenomenon that has started surfacing
after the global financial crisis of 2008-09.
World GDP and trade growth in lower gear
Commodity prices in the negative territory
14.0
60.0
12.0
40.0
10.0
20.0
8.0
0.0
6.0
-20.0
4.0
-40.0
2.0
0.0
2010
2011
2012
World GDP growth (%)
2013
2014
2015
2016
-60.0
2010
World trade growth (%)
2011
2012
2013
2014
2015
2016
Crude oil price growth (%)
Source: IMF, CRISIL Research
Weakness in global demand conditions – especially in China – have led to a decline in commodity prices,
with oil seeing the biggest plunge. IMF’s commodity price index data suggests the decline was the highest
in 2015 with oil prices and metal prices declining 47.2% and 23.1%, respectively. Since India is a net oil
importer, the huge decline in oil prices has been a blessing for it. Not only has it led to lower oil import bill,
and therefore reduced current account deficit, but also it has helped reduce the government’s fuel subsidy
bill significantly.
Subdued global environment has benefited India’s external position
While the week global demand conditions have resulted in lower demand for India’s exports, subdued
domestic investment environment and low commodity prices have led to a commensurate decline in
imports. As a result, India’s total trade as a proportion of its GDP, or the trade intensity, has come down.
But at the same time, India’s trade deficit has shrunk significantly in last two fiscals. The charts below
plot the two variables in real terms, i.e. excluding the price effects:
37
Trade intensity is declining…
…and so is trade deficit
Total trade (% of GDP)
Trade deficit (% of GDP)
6.6
56.0
55.6
6.4
52.0
49.0
43.7
1.8
FY12
FY13
FY14
FY15
FY16
FY12
FY13
1.9
1.4
FY14
FY15
FY16
Source: CSO, India
Accordingly, India’s overall current account deficit, too, is now in a comfortable zone – at 1.1% of GDP in
fiscal 2016, down from 4.7% of GDP in fiscal 2013. This, along with the improvement in other macro
parameters, especially the improving growth-inflation mix, has lent greater resilience to the rupee, as the
chart below shows. Despite a number of external shocks in the last two fiscals, the rupee has not
displayed volatility as in the past; it has been moving close to its trend line.
Rupee less volatile than in the past
Per US dollar
1. Grexit / bailout fear
2. Yuan devaluation
3. China stock market crash
4. Fed rate hike
5. Brexit
Fed QE taper
announcement
68.4
68.0
Greek exit and
credit freeze fear
Source, RBI, CRISIL Research
38
Jun-16
Feb-16
Oct-15
Jun-15
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Feb-13
Oct-12
Jun-12
54.2
Feb-12
Jun-11
Feb-11
Oct-10
Jun-10
Feb-10
Oct-09
Jun-09
Feb-09
Oct-08
Jun-08
Feb-08
52.1
57.2
Oct-11
EU double
dip fear
Lehman crisis
Exports still remain the weak link
While the trade deficit has remained muted so far as imports have fallen commensurately as exports, we
believe this could prove transient. While exports are likely to remain weak because of subdued global
growth – especially when there is structural weakness in trade, imports would rise as domestic demand
and investments pick up and commodity prices stabilise. That would bloat trade deficit again.
India’s target of doubling exports of goods and services to $900 billion by fiscal 2020 from $470 billion in
fiscal 2015 might prove a tad too ambitious if the current cyclical slowdown lasts and structural issues
are not addressed. The government’s flagship ‘Make in India’ programme, which aims to generate largescale manufacturing employment and make India a world-class exports hub, could also be left hobbled.
India’s exports have declined for the second fiscal on the trot now. The decline last fiscal was a steep
16%.
India’s merchandise exports growth
(%, y-o-y)
50.0
40.0
40.5
30.0
21.8
20.0
10.0
4.7
0.0
-1.3
-1.8
-10.0
-15.9
-20.0
FY 11
FY 12
FY 13
FY 14
FY 15
FY 16
Source: Commerce Ministry, India
For sure, a subdued global environment and a sharp decline in commodity prices – especially oil – have
been the main reasons for a decline in our exports. But it is also true that the decline has been more than
warranted. For instance, while world real GDP growth improved from 3.2% in 2009-2011 to 3.4% in 20122014, India’s real growth of exports came down from 11.1% to 4.1%. Falling competitiveness could be one
of the structural factors restricting export growth. For key export items such as gems & jewellery and
textiles which are labour intensive sectors, revealed comparative advantage (RCA) has come down over
the years.
39
Revealed comparative advantage of India’s top 10 export items
Commodity
Gems & jewellery
2004
Share (%)
2014
RCA
Share (%)
2015
RCA
Share (%)
RCA
16.7
8.41
12.8
3.38
12.1
3.94
Petroleum products
8.1
0.72
19.6
1.22
9.9
1.06
Automobiles
3.0
0.32
4.6
0.62
4.4
0.66
Nuclear machinery, boilers, etc
3.8
0.28
4.3
0.38
4.2
0.42
Pharmaceutical products
2.5
1.02
3.7
1.35
4.0
1.56
Organic Chemicals
4.3
1.62
3.8
1.66
3.6
1.89
Textiles
4.9
3.35
2.9
2.32
2.9
2.53
Electrical machinery & parts
2.6
0.19
2.8
0.22
2.5
0.21
Cereals
2.4
4.90
3.2
5.03
2.2
4.23
Iron & steel
4.6
1.68
2.9
1.31
2.2
1.20
Source: ITC database, CRISIL Research
A country is said to be internationally competitive (or having exports that are competitive) if it has the
ability to compete in the global market by either producing goods at a lower cost and/or selling them at a
cheaper price than competitor countries. An RCA greater than 1 for any commodity implies that a country’s
export has a larger share in world exports of that commodity relative to the country’s (aggregate) export
share in world exports. In this case, the country is said to have a revealed comparative advantage in
exports of the commodity.
Non-tariff barriers such as high transaction costs and infrastructure deficit, too, create hindrance as India
continues to lag most Asian peers on these parameters. Among its top 10 export items, India does not
enjoy competitive advantage in three and has seen competitiveness decline in three others. The present
government has been taking a number steps to create a level playing field, which was amply reflected in
India’s improved competitiveness rankings in the last two years. However, a lot more needs to be done.
Another concern is the threat from the Trans Pacific Partnership (TPP) forged between 12 countries
including the US. TPP countries account for 25% of India’s exports. By not being a part of TPP, India risks
losing out a significant chunk of its export market to rivals. India is negotiating some agreements
bilaterally with TPP members such as Australia and Canada, which can secure preferential access for its
exports. It is important that these agreements are concluded at the earliest.
Similar beneficial effects can also come from quick conclusion of negotiations on the Regional
Comprehensive Economic Partnership, being negotiated by the ten-member ASEAN group along with
Australia, China, India, Japan, New Zealand and South Korea. It has several members common with TPP
(e.g., Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam).
Additionally, India needs to invest quickly in skilling its large manpower and developing infrastructure to
be able to attract foreign investment and become a world-class exporting hub.
40
Brexit risk materialises
On June 23, 2016, the United Kingdom (UK) voted to leave the European Union, ending a 43-year-old
membership. While this was a major political and economic shock to Europe, the UK has become Ground
Zero of repercussions. Geopolitically, Brexit has taken the world to unchartered waters and increased the
uncertainty around the global economy.
S&P Global believes Brexit is unlikely to stall recovery in the Eurozone but will be a drag on growth in the
UK. It sees the Bank of England slashing its policy rate to zero by the end of 2016 and restarting
quantitative easing in 2017 despite fears of uptick in inflation caused by a pummelled pound. The flipside
is that the currency weakness will help reduce the UK’s current account deficit (CAD) of ~5% of GDP by
supporting exports and lowering imports. But other forms of capital flows such as foreign direct
investments are bound to suffer as investors postpone their decision or relocate due to heightened
uncertainty.
Real GDP growth projections (%)
2015
2016 F
2017 F
2018 F
UK
2.3
1.5
0.9
1.0
Eurozone
1.6
1.7
1.3
1.4
Source: S&P Global
Its impact on India
The channels through which global shocks get transmitted to India include trade, credit, investments and
capital flows. Also transmitted is the element of confidence. During the peak of the global financial crisis
in 2008-09, and also at the apex of the Greek crisis two years back, all of these were at play. Given the
uncertainty following Brexit, it should not be merely viewed as an event but as a process that will gradually
unfold – with intermittent mini-frights thrown in – as negotiations proceed. We have already seen how
capital flows affect the stock and currency markets. While we do not foresee India’s overall GDP growth
getting hurt after Brexit, there could be some impact on the economy:

No significant downside to overall exports: UK accounts for 3% of merchandise exports from India.
Further, India’s total trade (exports + imports) with the UK is only 2% of its external trade. Over the
medium term, India’s exports, especially in consumer-oriented sectors (auto components, textiles,
leather and footwear and precious stones and metals, which together comprise nearly 45% of exports
to the UK), and also in services, will depend on the severity of slowdown in the UK and ructions in the
exchange rate. India’s trade competitiveness with the UK will not just depend on how rupee behaves
versus pound, but also on what happens to the exchange rate of India’s competitors.

Brexit also creates a downward bias in domestic rates. While Indian yields have remained almost
stable, they have fallen significantly in major advanced economies which means India offers greater
yield differential, making its bonds attractive to foreign investors in the near term. The possibility of
the US Federal Reserve slamming the brakes on rate hikes for now improves the prospects of fresh
foreign portfolio flows into Indian debt, which, in turn, will put downward pressure on local yields.

India Inc could get impacted: Auto, IT, textiles, pharma, leather & metals are the most vulnerable
sectors (see chart below). Not only could there be reduced demand on account of potential slowdown
in UK and EU, companies may also, over the long-term, have to grapple with increased administrative
and compliance costs, as they may have to set up base in other countries also in the EU. On account
of the ensuing currency volatility, balance sheets of several companies may also get impacted on
account of exposure of unhedged overseas borrowings.
41
Some sector are vulnerable
(%)
Textiles
Export share to Europe
40
Auto
components
30
20
Pharmaceuticals
10
0
0
5
10
Export share to UK
Source: CRISIL Research
42
Information
technology
15
20
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