5 imponderables for Indian economy in 2017
Year 2016 started out with the belief that the Indian economy could touch the 8 percent growth mark. 2017 starts – apart from the overhang of the 8 November demonetisation shock - with the acknowledgement that this is not going to happen at least in the current fiscal. But what of later? Will 2017 see India moving towards setting the foundation for a sustained 8 percent growth, that dream target of whichever government is in power? That will depend on five imponderables:
The fallout of demonetisation: This is going to be the biggest imponderable facing the economy. Finance Minister Arun Jaitley believes the economy is not going to suffer very much on account of demonetisation. On December 29, he waved a bunch of figures (tax collection data, farm operations, air traffic etc) to argue that the economy was not in such bad shape as critics of demonetisation had been making it out to be.
But Jaitley speaketh too soon. Most of the figures he was quoting from relate to November and early December. There would have not been an immediate slump in consumption as people could have been spending money already with them. Remember, also, that there were several windows open for spending money in old notes – groceries at cooperative stores, purchase of fuel, payment of utility bills, sundry taxes, air and rail tickets. And as this article points out some of the statistics Jaitley quoted do not relate to the sections that have been most affected.
Different rating agencies and even public sector banks have put out varying estimates of the hit that the economy will take because of demonetisation, but they all appear to be educated guesses. Access to cash is still a problem at the end of 50 days, and it is expected to last till March and, despite the push for digital payments, this will have an impact on spending. There is no clear estimate about the extent of jobs lost; it will not be the several millions that the opponents would like everyone to believe but it will not be insignificant either.
So when the economy recovers to the pre-8 November state (remember it was not on steroids even then, as the growth data for the first half of the current fiscal showed) is anybody’s guess.
GST Rollout: There was much optimism about the prospects of the goods and services tax regime getting implemented from 1 April 2017 when Parliament passed the Constitution amendment paving the way for it. But the first signs of trouble came in September when the centre and the states couldn’t arrive at an agreement on dual administration of transactions above Rs 1.5 crore. This problem has not been resolved till now, as a result of which some of the draft legislations that needed to be passed in the winter session of Parliament could not even be taken up. The 1 April deadline is clearly not going to be met, but what about the October 2017 deadline?
But GST has got caught in politics once again. Furious over the demonetisation move, opposition parties (some of whom are in power in the states) are once again taking a hard line in negotiations. Constitutional requirements are less important than the political positions they take and, let’s face it, there is still a big question mark over whether GST will come into place in October 2017.
And what if it comes? Well, the gains from GST always come in the long term and there will always be pain in the short term. This will be exacerbated by the demonetisation. As R Kavita Rao of the National Institute of Public Finance and Policy has pointed out, GST is best implemented when the economy is on an upswing, not when it is laid low or is just about recovering. So how the twin impact of demonetisation and GST plays out will be something to watch closely.
Global trade: The prospects for the world economy in 2017 were anyway not very bright. In October, the International Monetary Fund (IMF) had wound down its growth estimate for the global economy from what it had projected in April. It particularly held out dim hopes for the advanced economies, the growth projections for which were reduced by 0.1 to 0.3 percent.
The World Trade Organisation (WTO) echoed this pessimism – it said world trade in 2017 could grow anywhere between 1.8 percent and 3.1 percent, when it had earlier projected a growth of 3.6 percent.
On top of this, there is growing protectionism across countries.
The biggest question facing the Indian economy is what Donald Trump will do once he takes charge. Trump has been quite vocal and unapologetic about shielding the American economy from invasion of foreign goods and foreign workers. The United States is India’s single largest export destination not just for goods (15 percent of exports) but services (close to 60 percent of software exports) as well.
Will Trump the president trump Trump the campaigner? India Inc. will certainly hope he will, but it will just have to keep its fingers crossed.
Protectionist sentiments are not, however, limited to the United States. The chances of right-wing parties coming to power in France and Germany are far from fading and this does not augur well for global trade. One also does not know how Brexit will play out exactly. India’s exports to Britain are just 3 percent of total exports, but the export basket is dominated by employment-intensive sectors like auto components and textiles, among others.
So any Indian hopes of making up what the economy loses on the domestic swings with gains on the global market roundabouts may not be fulfilled. And chief economic adviser Arvind Subramaniam’s constant exhortation that India should focus on export led growth will not find many takers.
Commodity prices: India has benefited greatly from the fall in commodity prices over the past two years, though the slump in commodity-exporting countries did have a slightly adverse effect as well. But things could change in 2017. The World Bank has projected a modest recovery for most commodities in 2017. It expects energy prices to jump 25 percent, metals and minerals 4.1 percent and agricultural prices 1.4 percent. Other reports have made similar projections. In end-November, the Organisation of Petroleum Exporting countries agreed to a production cut – the first since 2008. It then persuaded 11 non-members to follow suit.
A 25 percent increase in energy prices will be a significant burden for the Indian economy, considering it imports close to 80 percent of its requirement. That’s apart from throwing the government’s fiscal math out of kilter.
Actually, there is a fifth imponderable, that will determine how the Indian economy is affected by the other four - the Modi government’s handling of the fall out of these challenges these throw up and how Indian politics plays out. If the Modi government is not up to the task or it does all the right things but is consistently blocked then there’s little hope for the economy. The assembly elections coming up in 2017 will, therefore, be a very crucial imponderable.
So in January, all one has to do is to cross one’s fingers and keep them crossed.