Sep 21, 2016, 2:58 PM ETPanel, Conference Presentation

India's Road to Prosperity: Two Steps Forward, One Step Back

India's GDP is estimated at $2.4–$2.5 trillion with a recent quarterly growth rate of 7.0–7.1%, though these figures face scrutiny regarding accuracy.
The Index of Industrial Production (IIP) showed a 2.4% decline, but excluding the rubber insulated cables sector, the index actually rose by 1.9%.
A "mixed consensus" exists: while global observers view 7% growth as strong, domestic stakeholders and data anomalies suggest significant underlying weaknesses.
Forward-looking sentiment is tempered by the observation that growth rates of 13% (as seen in China) are unrealistic for India due to the "fixed cost of democracy."
Experts predict India will experience "consistent warmth" rather than extreme volatility, with growth rates stabilizing around 6–7% long-term.

2014 Expectations vs. Reality: Panelists note that the 2014 election mandate for radical reform was not fully realized; the government focused on administrative efficiency rather than shrinking the state or privatization.
Continuity in Administration: Despite political changes in 2014, the bureaucratic machinery remained largely unreformed, with critics describing the situation as a "strong consensus for weak reforms."
Judicial Intervention: Judicial activism has filled a void left by government inaction, particularly regarding environmental regulations and contract enforcement; 80–90% of citizens reportedly trust the courts more than the government.
Identity Politics: The 2014 hope that a development narrative would supersede identity politics has not materialized, with caste and regional politics remaining robust.
Federal Tensions: A structural disconnect exists between the central government's "one-size-fits-all" policies and the diverse needs of India's 29 states, which possess distinct economic profiles.

Lateral Entry: The influx of external talent ("lateral entries") into the civil service remains critically low, with only 2% resignation compared to ~25% in the US, perpetuating insular thinking.
Urban Governance: Power is not devolved to cities; mayors are often puppets of state chief ministers, lacking financial or functional autonomy despite India being ~50% urban.
Public Sector Banks (PSBs): Public sector banks hold 70% of the loan book, with estimated stressed assets (NPAs) of $200 billion, a 20x increase from four years prior.
Contract Enforcement: The judicial system creates a 15–20 year timeline for resolving contract disputes, acting as a significant deterrent to investment and capital formation.
Regulatory Cholesterol: Over 27 distinct labor law numbers and 50 billion sheets of paper filed annually by corporations stifle formal sector growth and employment.

Urbanization Reality: While official census data cites 31% urbanization, independent estimates suggest 50% of India's population is already urban, creating a mismatch with rural-centric political policies.
Manufacturing Lag: India's manufacturing employment stands at 11% of the labor force (compared to a historical peak of 30–45% in other nations), with the government unable to create the conditions for "spontaneous combustion" of formal jobs.
Job Creation Trends: The fastest-growing formal sectors are currently customer service, sales, and logistics (domestic consumption), rather than heavy manufacturing.
Demographic Dividend Risks: The window to convert demographics into an economic dividend is narrowing; without structural fixes in labor and capital, the dividend risks becoming a nightmare.
State-Level Disaggregation: Investors are advised to treat India as a union of states (e.g., Kerala vs. Uttar Pradesh) rather than a single homogeneous market to mitigate risk.

Private Sector Investment: Private sector investment has declined as a share of the economy due to a combination of the banking crisis and heightened risk aversion among promoters.
Stalled Projects: 48% of stalled projects are attributed to promoters losing interest, often linked to pre-existing corruption or money skimming.
Sectoral Recommendations:
- Technology: Less sensitive to policy volatility.
- Real Estate: Reshaped by the Real Estate Regulatory Authority (RERA) bill, which imposes strict liabilities and may force many builders out of business.
- Infrastructure/Housing: Massive potential if bottlenecks like land acquisition (including defense and railway land) are resolved.
Capital Mobilization: To attract global capital, India must address state risk, FX risk, and the government's need to clarify currency stability measures.
Formalization Roadmap: Future reforms aim to utilize the "India Stack" for paperless, cashless, and presenceless labor law compliance, potentially formalizing the business environment within 18–24 months.