Transform or Perish?

As we reach the end of a momentous year for India and the deadline expires for bank-depositing the demonetized notes, it’s time to put things in perspective, take stock and prepare for the country’s unprecedented, formidable and arguably irreversible journey of economic transformation in 2017.

But first, let’s address two of the most critical questions for decision-makers (from within the family unit to the highest seats of legislation and justice), innovators and investors to consider, because the fate of the country lies in their collective hands:

1.    As India attempts to undergo an unprecedented transformation at breakneck speed to a largely digital and less-cash economy, are its core strengths reasons for hope?

2.    Is making the Modi government pay a dear political cost for the re-monetisation in the best interests of 1.25 billion of us, of whom 65% is below the age of 35? In other words, must yet another aspiring generation of Free India fizzle out in wait for the country to move on from the old order of scarce job opportunities, rampant corruption, mediocrity, wasted time and precious public money?

Arriving at the answers may vary according to your political fix. But it’s a fact that re-monetization is giving the floundering Indian banking sector quite a lifeline that would have otherwise not come so quickly to help sustain India’s decades-old high growth rate.

A robust banking sector is the backbone of any economy. However, UPA-2 left the Modi government with a banking sector that had, by 2015, the fourth-highest proportion of Non-Performing Loans (NPLs) – which had questionably doubled from 2009 – among the developed and major emerging economies.

Today, with re-monetization, it is estimated that the banks will have about Rs. 6 lakh crores or Rs. 6 trillion with them. By applying the Fractional Reserve basis of the banking system, this means a whopping corpus of 6 or 7 times more credit available in the banking system.

On December 31st, this Saturday, amidst an inevitable din over the war on black money, look for what Prime Minister Modi has to say about the highest priority areas for making the best impact of more government funds and easier bank loans.

For now, the highest priority appears to be widespread, secure and efficient Internet access countrywide for fast transformation to Digital India before public patience over financial inclusion runs out (at present, only two per cent of transactions are digital, compared to 45% in the U.S. and other advanced economies). 

The entire banking system is currently being churned up and even a minimum spend to upgrade about 70% of the over two lakh ATMs across the country that currently run on a defunct Windows XP for which Microsoft has stopped offering security updates and patches, would be a sizeable amount in itself – not to mention everything else that needs to be done to mitigate the adverse impacts of the tidal wave of change from cash to a mobile wallet that is sweeping across the country.

 The rise of cyber-crime worldwide must be addressed if Digital’s India’s foundation based on the Aadhaar card system has to efficiently support the next level of closing the tax gap – about as large as two-thirds of overall taxes owed – while ensuring, at the same time, lower ‘cost of cash’ to stimulate economic activity across the board and thereby justify the move for economic inclusion of all.

 According to a study by the Institute for Business in Global Context at Tufts University, India is the least prepared but has the highest potential to benefit most from going “cashless.” The study puts India among the highest in a list of over 70 countries in terms of the cost of cash to consumers – by computing ATM fees, operation and maintenance; time spent in collecting cash; money spent by businesses in handling, securing and transporting cash; cost of printing money; and lost tax revenue. Specifically, the economic transformation underway aims at cutting cost of cash and boosting tax revenue.

 Modi’s December 31st report to the nation should provide an idea of the stimulus package in store for Union Budget 2017 that has been advanced to February 1 and will end the 92 year-old practice of separate general and rail budgets. By every measure, it will be one of the most crucial budget for independent India.  

The Budget must predominantly aim to unlock value trapped by transaction costs and frictions inherent to cash-intensive societies. Of course there are several urgent areas of government spending needed to power up the economy for the envisioned leap to an altogether different digitized dimension of more transparent transactions and better efficiencies for individual, business and government wealth creation. But only discretionary higher spending by government to help catalyse private economic activity will help pacify a population that’s already weary from waiting and wondering at the ATM line whether it’s only about black money that most of them don't have in the first place.

 Make no mistake, black money will undoubtedly find its sustainable level, which at best can only be lowered. Process efficiency in containing black money is the key; recovering the illegal fortunes stashed away abroad is perhaps as complicated for the present political dispensation as it was for the past. Acting on prevention and tracking with far sharper scrutiny and data retrieval through digitization is hence, it can be argued, the more pragmatic option to set off the war on black money.

 While the jury is still out on black money and government preparedness to tackle the nitty-gritty of sudden demonetisation, it is evident that the exercise was structured to bring the financially weaker sections of society into the thick of mainstream opportunities. The Micro Units Development and Refinance Agency Bank (or MUDRA Bank), a public sector financial institution launched by the prime minister in April 2015, offers proof of ground laid for this purpose well in advance. Mudra Bank provides loans at low rates to micro-finance institutions and non-banking financial institutions, which then provide credit to MSMEs. Imagine what newfound bank largesse with quick processing of loans through digitization can do to empower this vast grassroots segment of the population. As such, it is time to bring micro-credit institutions under the regulated regime and sanitize cooperative societies for development, ideally the Amul way.

 Another critical milestone in the coming year is April 17, when the Goods and Services Tax (GST) council must reach a consensus and roll out the new tax structure. This is a time-critical transformation goal. If achieved, India would emerge as a single market encompassing about one-fifth of the world’s population –potentially the world’s most attractive investment destination with democracy and an increasingly digitized and transparent economy to boot, at a time when most of the rest of the world is in fragile economic transition.

 Already on the World Economic Forum’s Global Competitiveness Index, India has jumped 16 positions in 2016 – for the second year in a row – to reach the 39th rank out of 138 countries listed. But while we have made quantum leaps in competitiveness in the past two years, we rose by only one position to 130 out of 190 countries in the World Bank’s ‘Ease of Doing Business’ ranking in 2016. For 2017, the Department of Industrial Policy and Promotion (DIPP) and dedicated ministries responsible for delivering on various parameters aim to jump 80 spots and break into the top 50. The sheer extent of the leap envisaged suggests an all-out bid to hit a tipping point in how the world perceives India’s economic potential.

 For once, India’s new economic cause, which has already affected all, is in head-on collision with its much-maligned political course of opposition and disruption by any means possible in order to preserve the status quo of deliberate paralysis and underhand pay-offs at every turn. It’s a grave situation for one and all, with the short, mid and long-term future of the country at stake all at once.

 Incidentally, the emerging global economic situation is no less precarious. Global trade hit rock bottom in 2016, its lowest dip since the 2008 recession. The U.S. economy is on the uptick, the dollar is getting stronger and the Fed is expected to announce more rate hikes over the year, which will impact markets the world over, India included. More dangerously, Donald Trump threatens to disrupt the World Trade Organization as President and set off a full-on trade war with a China that is defiantly holding up in the face of widespread projections of imminent economic disorder. Elsewhere, Japan, another major economy, is steadily emerging from stagnant growth like the US, but that’s offset by the rest of the developed world being in deep trouble after Brexit and its potential impact on the UK and Europe.

 Furthermore, there are upcoming presidential and parliamentary elections in France and Germany, general elections in the Netherlands, Norway and the Czech Republic, presidential elections in Hungary and Slovenia and local elections in Portugal, all of which can disrupt global economic recovery in 2017, especially if the politics of xenophobia and exclusion, which brought about Brexit and the rise of Trump in 2016, prevails. In sum, a new global economic order appears to be taking shape with the most of the developed and emerging nations locked in major economic and societal transformation in 2017, for better or worse.

 No matter whether you see the India cup as half full or half empty, we Indians are all in it together and have only two options: Either be proactive to make the most of the untold opportunities opening up with economic transformation or be in denial and fall by the wayside. There’s clearly no going back now on re-monetisation without risking a far more serious economic downslide for the country and for you.

 It’s your call. Don’t lose sight of the milestones ahead to reassess your financial position and act accordingly. Have a great year!