IN JANUARY 2014, Morgan Stanley clubbed India into the group of fragile five nations along with Turkey, Brazil, South Africa and Indonesia. Coming after years of high inflation, interest rate spiral, sliding GDP growth, depreciation of the rupee amidst U.S. Federal Reserve taper of 2013, policy paralysis and a twin balance sheet crisis waiting to gnaw at banks and corporate sector, the sobriquet of fragile five was a new low for the Indian economy.

Macroeconomic indicators favoured the Morgan Stanley thesis. Real GDP growth had slipped from a peak of 9.28% in FY06 to 6.37% in FY14, while retail inflation zoomed to 9.38%, bolstered by skyrocketing food inflation, which peaked at 12.09% in FY14. Between May-August 2013, the rupee depreciated over 15% as foreign institutional investors liquidated both equities and bonds. The shockwaves from the U.S. curtailing the Treasury Bill-buying programme meant to pump-prime its economy out of the 2008 slowdown caught Indian policymakers unawares.

No amount of marathon meetings between then finance minister P. Chidambaram, economic affairs secretary Arvind Mayaram, and RBI governor D. Subbarao could salvage the rupee. Monetary tools available were deployed and interest rates were raised. The repo rate went up to 8% in January 2014. Economic growth was a natural casualty.

As India went to polls in April–May 2014, the Bharatiya Janata Party (BJP)-led NDA came to power with the first clear majority in Lok Sabha in 25 years and Narendra Modi took over as India’s 14th Prime Minister. In the run-up to elections, Modi’s poll plank had been economic growth, reforms, and banks’ non-performing assets (NPAs). The motto: Perform, reform and transform.

Once the results were out, it was time to deliver. Modi chose the banking sector first. A deeper malaise of rising NPAs threatened the banks and the sector as a whole. Within months of taking over as the prime minister, Modi roped in his trusted chieftain — Hasmukh Adhia — a 1981 Gujarat cadre IAS officer, as the banking secretary in November 2014. Adhia had his task cut out — to initiate the process of NPA recognition in the banking sector.

While that was happening, another focus area was to digitise the economy. Though Digital India was formally launched in July 2015, the seeds of change started earlier. In end-June 2014, former UIDAI chairman Nandan Nilekani was about to vacate his official bungalow in Lutyens Delhi amid apprehensions of the Modi government shutting the Aadhaar project. Nilekani who held the post till March 2014 had resigned since he was to contest elections on a Congress ticket from Bengaluru.

Before Nilekani left Delhi, Ram Sevak Sharma, then director-general of UIDAI, who had a meeting with PM Modi on Aadhaar, met Nilekani over lunch. Sharma apprised him about his meeting with PM Modi and suggested he should meet him. Nilekani, who was wary given the BJP’s opposition to Aadhaar and his own political candidature, met Narendra Modi in the first week of July. Modi is understood to have taken feedback from Nilekani on data security. He convinced him that the BJP was not against Aadhaar.

Soon after, in August, Modi rolled out the Jan Dhan Scheme for financial inclusion of those outside banking services. This was the first step of the JAM (Jan Dhan Aadhaar Mobile) trinity that linked people’s bank accounts to their mobile numbers and biometric identity.

It tied in with the initiative that kicked off in late 2014 to assess the extent of NPAs, which brought to the fore the malaise in banking and formed the base for reforms such as Insolvency and Bankruptcy Code, 2016, and key policy interventions, including bank recapitalisation. Adhia also spearheaded the rollout of Goods and Services Tax (GST) in 2017.

Since then, the reform bandwagon has been rolling, with few hits and misses. Reforms have been rolled out across corporate tax, real estate, FDI, defence, insurance, retrospective taxation, the post-Covid Atma Nirbhar Bharat initiative and recently, implementation of foreign trade policy. Alongside mega reforms, came key policy interventions such as FAME scheme for incentivising electric and hybrid vehicles, infrastructure push, bad bank, reviving stalled housing projects through the Swamih scheme and digitising the economy.

The Modi government has had its share of misses as well: Farm and labour laws, land reforms and demonetisation, which took away gains made between 2014 and 2016. But reforms and policy tweaks continued unabated. Importantly, the government avoided any ‘policy silence’. In nominal terms, the Indian economy is expected to more than double from ₹124.67 lakh crore in FY14 to ₹272.04 lakh crore in FY23. That explains Modi’s confidence in the economy in last nine years. At an event earlier this year, Modi invoked the Morgan Stanley sobriquet saying that by re-imagining and re-inventing every element of governance in last nine years, his government has transformed the country from fragile five to anti-fragile.

Banks: The Big Clean-Up

When this government came to power, banking was in distress with burgeoning NPAs. Being the main source of credit for all sectors, the banking system is essentially the backbone of the economy. The Indian banking system is one of the largest financial systems globally with over 100 banks and lakhs of branches doling out credit in nooks and corners of the country. The significance of banking can be understood from the fact that the quantum of loans and advances the Indian banking system handles is almost half the size of the economy in nominal terms. Bank credit stood at ₹129.26 lakh crore as of November 2022, almost half the country’s nominal GDP projection of ₹272.04 lakh crore for FY23.

By FY14, the terminal year of the UPA government — top 10 NPAs, including loan to bad debt poster boy Vijay Mallya — had principal of just ₹20,000 crore at risk. But that was just the tip of the iceberg. The NPA problem was deeper. That was exposed by the asset quality review initiated by the NDA government. Months before the new government was sworn in, in December 2013, the Reserve Bank of Indian (RBI) had already raised a red flag. “NPAs need to be tackled on a priority basis to ensure they do not grow to alarming proportions,” said the RBI’s Financial Stability Report. The government knew banks had to be the first port of call to bring the economy back on track.

The need for a transparent recognition of NPAs came to the fore and the government initiated asset quality review in banking spearheaded by Adhia, who served as the necessary bridge between PMO and banks, apprising the apex executive about issues faced by the sector. Skeletons tumbled out of the closet, gross NPAs in the banking system peaked at 14.46% in March 2018 to ₹10.03 lakh crore. It was down to ₹7.4 lakh crore in FY22.

The government followed a two-pronged approach to address the banking crisis. One, it kept recapitalising banks and put in place the Insolvency and Bankruptcy Code. Both began in 2016, when asset quality review started indicating that banking was neck-deep in NPA crisis. Between FY17 and FY21, the Centre infused ₹3.31 lakh crore into banks. The situation has since improved. RBI governor Shaktikanta Das said in his address at Global Conference of Financial Resilience that gross NPA ratio for Indian scheduled commercial banks was 4.41% in December 2022, down from 5.8% in March 2022 and 7.30% on March 31, 2021. Under IBC too, over 6,000 cases have been resolved for recovery of ₹2.5 lakh crore out of accepted claims of over ₹8 lakh crore. “Indian banking had high level of NPAs in the past, which significantly reduced and there has been progressive deleveraging of stressed balance sheets. Despite the pandemic, gross NPAs as of September 2022 have reached a seven-year low of 5%,” says EY’s India@100 report, realising the potential of $26 trillion economy in 2047. In another report released recently, Nuvama Professional Clients group has said it is positive on prospects of banks delivering healthy credit growth in the near-to-medium term as they are adequately capitalised and doing well in asset quality terms.

In nine years, the Modi government has come a long way from legacy issues overburdening them, says Sunil Sinha, director, public finance, India Ratings. “Banks have good capital adequacy now. They are well capitalised to fund growth,” he adds. The move augurs well for the economy as it will ensure the banking system’s support to future economic growth, especially with mega plans on infrastructure.

The Infra Push

In the early years of Modi rule, the macroeconomic leverage a healthy banking system would have brought about got hit by two back-to-back onslaughts — demonetisation (November 2016) and GST rollout (July 2017). While demonetisation crippled the cash-dependent unorganised sector, GST’s initial glitches and inconsistencies posed an unusual challenge to the corporate sector just when GDP growth mounted to 8.32% in FY17 after almost seven years. Other global factors, including the US-China trade war and turbulence in India’s non-banking financial companies (NBFCs) added to the woes, and GDP growth came crashing down to 4% in 2019-20.

This was when various engines of growth hit a new low. Export growth in FY17 slowed to 4.97% from 8.17% in FY14; private investment as percentage of GDP fell to 25% in FY17, from 31% in 2011, according to data from World Bank. Consumption was still to recover from demonetisation, and the government had to keep the economic engine chugging and opted for the fourth engine of public expenditure.

Centre’s annual capital expenditure has more than trebled to ₹7.5 lakh crore in FY23 from ₹2.29 lakh crore in FY14. Considering the allocation for FY24, annual infrastructure expenditure has risen over four-fold to ₹10 lakh crore. Most has been for highways, railways and infrastructure creation for potable drinking water and green energy. In highways, between FY17 and FY24, the government allocated ₹8.22 lakh crore. Annual capital expenditure allocation to highways has gone up from ₹17,332 crore in FY14 to ₹2.58 lakh crore in FY24. The amount being pumped into infrastructure is showing results as annual highway construction has grown three-fold in last nine years.

“Infrastructure agenda has been brought to the forefront. Taking policy efforts in totality, what the government has enabled or achieved is pushing public infrastructure or manufacturing of the economy to the forefront. This is work in progress,” says Suvodeep Rakshit, senior economist, Kotak Institutional Equities.“There are various drivers, like the corporate tax cut, PLI scheme and Gati Shakti. But the bigger agenda is investment, and manufacturing becoming a central theme from an economic perspective,” adds Rakshit. Sinha believes the government handled road sector issues successfully. “Stuck highway projects have been initiated and are giving results. New construction is being made,” he adds.

When the NDA government came to power, the highways sector had stalled with high inflation of preceding years, jacking up project costs and distorting internal rate of returns for developers. Project delays were regular, bringing daily construction average to 12 km a day in UPA’s terminal year. BJP took it as a challenge to reinvigorate the highways sector. The Modi government opted for the engineering procurement contract (EPC), where traffic risk is not with developers, both traffic and funding risks are borne by the government. This worked and highway construction now averages 38 km a day.

Benefits have started accruing to logistics companies. “The multiplier effect of highway infrastructure is visible. Road network has improved, transit time has reduced and bottlenecks are down. In all key performance areas, there has been some improvement,” says Vineet Agarwal, managing director, Transport Corporation of India.

According to ICRA, road construction is likely to see substantial ramp-up this fiscal on the back of a healthy pipeline of projects and enhanced capital outlay. It expects execution in FY24 to grow 16-21% to 12,000-12,500 km with the focus on project completion ahead of elections next year. This is a massive upside — almost three times — from 4,260 km in FY14.

Going forward, the Ministry of Road Transport and Highways plans to increase the total length of national highways to 2 lakh km by FY25, compared with 1.41 lakh km now. This is more than double the highway length of 91,287 km in FY14. This means the ministry will be taking over more state highways under its fold or develop greenfield roads in the next two years.

Road construction was impacted in H1 FY23 due to higher commodity prices and prolonged monsoon in parts of the country. “The situation improved in H2 FY23,” says Vinay Kumar G., sector head, corporate ratings, ICRA. Construction in the current fiscal is likely to spring back due to a strong project pipeline.

Railways has been another focal point of the Centre’s infrastructure push. In nine years, the allocation to upgrading railway infrastructure has risen nearly 10 fold from ₹26,000 crore in FY14 to ₹2.4 lakh crore this fiscal. Several projects are mega Make-in-India projects, offering public procurement opportunities to domestic firms. The Vande Bharat Express is a case in point. The ecosystem of indigenous manufacturing of these trains offers ₹22,000 crore procurement opportunity for domestic suppliers. Such projects ensure domestic suppliers of steel, electronic components, plastic and aluminium have no dearth of opportunities. The same applies to the dedicated freight corridor. Railways, however, need to fast-track completion of both Western (Dadri-JNPT) and Eastern (Ludhiana to Dankuni in Bengal) corridors, which are 87% and 91% complete, respectively.

Then there is green energy infrastructure. India committed to reducing emissions to net zero by 2070 and policy initiatives are being aligned to deliver that. In line with the Prime Minister’s announcement at COP26, the Ministry of New and Renewable Energy targets 500 GW installed electricity capacity from non-fossil sources by 2030. As of October 31, 2022, India had only 172.72 GW of non-fossil fuel capacity. This includes 119.09 GW from renewable energy, 46.85 GW from large hydro and 6.78 GW nuclear power. One of the key projects under the solar initiative is solar parks and ultra-mega solar power projects with target capacity of 40 GW by March 2024. Solar parks offer a plug-and-play model, by facilitating infrastructure — land, power evacuation facilities, road connectivity, water and statutory clearances. As of October 2022, 56 solar parks have been sanctioned with cumulative capacity of 39.28 GW in 14 states.

The Centre is developing the National Green Hydrogen Mission to decarbonise major sectors, making India energy independent. It has brought traction among the private sector, which has lined up mega investments. Reliance Industries has announced ₹75,000 crore investment in new energy business, while Adani Group has announced investment plans of over $50 billion in the next 10 years predominantly focusing on energy transition, with up to 70% asset allocation to the segment. Tata Power will develop around 10,000 MW of renewable energy capacity, majority of which is solar, in the next five years in Rajasthan. Tata Power Renewable Energy last year raised ₹2,000 crore from GreenForest New Energies Bidco, backed by BlackRock.

Infra: The Gati Shakti Factor

For years, one reason why infrastructure projects got delayed was because departments worked in silos. The Centre conceived the Gati Shakti project in 2021 — a master plan for multi-modal connectivity. It is a digital platform bringing 16 ministries, including railways and roadways, together for integrated planning of infrastructure projects.

All logistics and infrastructure projects of more than `500 crore are routed through the project monitoring group (PMG). “PM Gati Shakti offers big data. We have 1,600 layers of data. It gives 3D visibility, soil classifications, and underground geology, among others,” said Anurag Jain, secretary, Ministry of Road Transport and Highways, at an Assocham conference on infrastructure. In the first year post launch of Gati Shakti, the PMG monitored 1,380 projects of which 345 belonged to the private sector. In all, 1,300 issues have been resolved.

Ministries have identified and formulated targets for projects to be taken up under Gati Shakti NMP. In most cases, ongoing projects have been put on Gati Shakti platform to avoid infrastructure development in isolation. Under Gati Shakti NMP, the ministry has 22 greenfield expressways, 23 other key infrastructure projects and highway projects and 35 multi-modal logistics parks, which are part of the Bharatmala Pariyojana. Some major expressways under construction include Delhi-Mumbai Expressway, Delhi-Amritsar-Katra Expressway, Bengaluru-Chennai Expressway, Amritsar-Bhatinda-Jamnagar Expressway and Hyderabad-Vizag Expressway.

The Ministry of Ports and Shipping, too, has made headway in bringing projects under Gati Shakti. The shipping ministry has identified 101 projects estimated to cost around ₹62,627 crore under Gati Shakti. It is also working on development of waterways-led transport and logistics networks. Cargo-handling capacity at ports is set to go up to 1,759 MMTPA in FY25 against 1,189 MMTPA this fiscal.

The railways are looking at a total cargo handling capacity of 1,600 million tonnes by FY25, against 1,410 million tonnes in FY22. The Ministry of Petroleum and Natural Gas is targeting to lay 34,500 km of gas pipeline by FY25, against 20,000 km in FY22. The Ministry of New and Renewable Energy has identified projects to enhance capacity to 225 GW by FY25, from 87.7 GW in FY22. “Initiatives like Gati Shakti and National Logistics Policy will accelerate sectoral growth, ultimately bringing down logistics costs. These policies put in place public digital assets like the ONDC or the unified logistics interface programme, thereby accruing the same benefits that UPI brought to the financial sector,” says Rampraveen Swaminathan, managing director and CEO, Mahindra Logistics.

Digital Economy

If physical infrastructure creation provided the fillip to the economy, digitalisation is bringing about tectonic structural shifts. The Jan Dhan Aadhaar and Mobile platform (JAM trinity) ensured India could hand-hold the needy during the pandemic. Genuine beneficiaries got direct central assistance to their bank accounts. To date, over 300 Central government and 400 state government schemes have been linked to Aadhaar. Prominent ones include LPG subsidy transfer, MGNREGA, PM Kisan Samman Nidhi in which an annual direct benefit transfer of ₹6,000 is provided to farmers. The Centre estimates in nine years it has saved close to ₹2.5 lakh crore in direct transfer to beneficiary accounts by plugging leakages.

Since the government’s support to Aadhaar, there has been no looking back. Jan Dhan accounts were being opened in campaign mode. This followed Aadhaar seeding of accounts establishing a link between the digital identity of the account holder, his mobile number and bank account number. “Benefits are reaching people towards whom it was targeted, leakages are minimal, subsidies are more targeted,” says Sinha.

The Aadhaar ecosystem earned acknowledgement from Paolo Mauro, deputy director in the IMF’s fiscal affairs department. World Bank president David Malpass, last year impressed upon other countries to adopt India’s targeted cash transfer instead of broad subsidies.

Aadhaar has emerged as big boon to banking, insurance and financial sectors. Over 2.30 billion Aadhaar authentications were done in March, up from 2.26 billion in February. In all 14.7 billion Aadhar e-KYC transactions have been done till date. The ground gained through Aadhaar has been taken forward by the United Payments Interface (UPI) — a real time money transfer system developed by the National Payments Corporation of India for person to person and person to point of sale transactions through bank accounts. More than 300 banks are now linked to the UPI platform, compared with just 21 in 2016. In 2022, 74.05 billion UPI transactions worth ₹126 lakh crore took place. UPI transaction in 2022 was up 91% in volume and 76% in value against 2021.

The next big digital move is the Open Network for Digital Commerce (ONDC), which brings buyers and sellers on one platform — a ground breaking move to democratise the digital commerce universe. “ONDC is the next big thing at a time when the world is facing oligopolies of big companies,” says Jain. It is being tested currently in 236 cities.

Economic Transition

On the macroeconomic front, the economy has shown growth and resilience, despite the pandemic and global economic shrinkage. The Indian economy is expected to grow 51.7% (in real terms) to ₹159.7 lakh crore in FY23 from ₹105 lakh crore in FY15. Nominally, it is set to attain ₹272.04 lakh crore in FY23, more than double the ₹113.55 lakh crore in FY14, but still a considerable distance from the $5 trillion target set for 2025.

Despite the pandemic and runaway inflation, prices are nowhere near their FY12 highs. Economists feel more needs to be achieved to qualify the growth as transformational, while some call for greater push to pending reforms. “It has so far been a mixed bag. Average GDP growth in the UPA regime has been higher than during the NDA’s nine-year period,” says Sinha.

“On the reforms agenda, land and labour still haven’t happened. One could argue it is not the Centre that should do it, but state governments. But movement comes from the Centre and states pick up. From the policymaking perspective, these are areas where the agenda should move forward. When you are trying to push forward a manufacturing hub, you need land and labour at par with policies in competing countries such as China and Vietnam,” says Rakshit.

“Finding a direct correlation between the policy efforts of nine years and the impact thereof on growth and other macros may be tough in the short term. Reforms announced in the last couple of years are still work in progress. These reforms will take time to yield growth or specifically broad-based growth,” says Dipti Deshpande, principal economist, Crisil.

As the government completes nine years in office, the Indian economy has come a long way from policy paralysis in the terminal year of the Congress rule to policy action, novel ideas and right platforms. Those are works in progress and benefits should accrue in due course. India’s burgeoning domestic consumption, services exports and massive capital outlays hold promise for future economic growth. An economic miracle may still be distant, but the economy seems to be on course.

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