The overall GDP would benefit as more businesses become tax compliant and fall within the regulated economy. This would
improve the tax-to-GDP ratio and, eventually, result in lower tax rates and higher consumption. In fact, these two crucial
reforms would set the growth ball rolling at a good speed in coming years.
Other reforms such as e-governance and the introduction of direct-benefit transfers into Aadhaar-linked bank accounts
would eliminate waste, increase financial inclusion, and draw more people to mainstream banking channels. Simultaneously,
this would increase bank deposits, leading to a probable reduction in interest rates.
Projects in capital-intensive sectors such as power, roads, ports, railways, waterways could become increasingly
affordable due to lower interest rates.
In 2015, government unveiled the housing for all scheme, aimed at building 20 million houses by 2022. Loans up to Rs6 lakh
would be extended at lower rates.
Besides, banking reforms have been taken a step further when the government created the Bank Board Bureau to revamp banks. Public sector banks (PSBs) are being merged as the government seeks to consolidate 27 PSBs into seven banks. PSB re-capitalisation is now being linked to better banking performance.
The new Bankruptcy Code would create new debt-recovery tribunals and could speed up insolvency proceedings, which could
boost recoveries of non-performing assets (NPAs) from stressed companies. All these initiatives in banking would boost
The government is also looking at containing inflation to help long-term growth. While lower food prices could impact
(companies)in the short run; in the longer run, lower inflation is far more acceptable as it creates more sustainable
levels of growth in the economy.
We are now in an accumulation phase where holding financial assets makes more sense than owning physical assets. Over
longer time frames, financial assets would provide better investor experience as compared to physical assets like real
estate and gold. This is the accumulation phase that investors cannot afford to miss. Indian investors have just 2.8% of
household wealth in equity, while 12.5% is in gold and 56.4% in real estate. Physical assets comprise about 69% of
The figures indicate that the growth of financial assets in Indian households would only increase over time as structural
changes in the economy lead to much lower and steadier inflation over the coming years. Reforms could lead to higher
growth in the economy once it stabilises, more currency enters the Indian market, and investment in infrastructure
The pace of recovery in the economy would be slow at first. In fact, whenever major reforms are initiated, it’s not
prudent to pen a number to short-term losses, but to look ahead at the bigger gains, both tangible and intangible.
We may see a negative impact in corporate earnings for one or two quarters, but the next few years will see a strong
rebound in earnings as reforms take root and the pent-up demand returns to the economy.
It’s important for investors to invest in financial assets, ignoring the current low-return phase and instead focusing on
acquiring more equity and fixed income assets.
Equities are now available at reasonable valuations. Our market valuation tool indicates that we are close to the buy
zone. Don’t miss this investment accumulation period; you might not see a similar buying opportunity over an extended
period of time.
This article was published on December 07, 2016 in Mint