Business Sphere - - CONTENTS - By Our Cor­re­spon­dent

With the ef­fects of de­mon­eti­sa­tion and the tran­si­tion hic­cups of the GST firmly be­hind, In­dia's eco­nomic growth is likely to pick up in the new year but ris­ing oil prices and a firm­ing in­fla­tion may spoil the party. Some be­lieve 2017 is best for­got­ten as the twin blows of de­mon­eti­sa­tion and man­gled Goods and Ser­vices Tax (GST) ripped the econ­omy for the most part. By some ac­counts, loss to GDP has been es­ti­mated to be around 2 per cent of the GDP. This trans­lates into Rs 3.05 lakh crore con­sid­er­ing 201617 GDP of Rs 152.51 lakh crore. But the worse seems to be over and there are early signs of re­cov­ery. Af­ter fall­ing for five suc­ces­sive quar­ters from 9 per cent in the fourth quar­ter of FY2015-16 to a low of 5.7 per cent in the first quar­ter of FY201718, the GDP growth at 6.3 per cent in the July-Septem­ber quar­ter of 201718 re­versed the trend. Within GDP growth num­bers, a highly en­cour­ag­ing sign is that while ex­port growth has re­mained pos­i­tive, im­port growth has fallen. Af­ter the au­da­cious Novem­ber 8, 2016, de­ci­sion to scrap high-value cur­rency, Prime Min­is­ter Naren­dra Modi's gov­ern­ment im­ple­mented bold re­forms in­clud­ing rolling out GST from July 1 and the In­sol­vency and Bank­ruptcy Code (IBC). Also, it com­mit­ted to in­ject­ing size­able cap­i­tal into the bank­ing sec­tor to ad­dress the 'twin bal­ance sheet' is­sue and works to­wards im­prov­ing farm in­comes. While th­ese re­forms brought short­term eco­nomic pain, they have boosted In­dia's medium-term out­look. While Moody's up­graded In­dia's sov­er­eign rat­ing by one notch to Baa2 and changed its out­look to sta­ble from pos­i­tive in Novem­ber, World Bank gave In­dia a 30 place jump on its Ease of Do­ing Busi­ness rank­ing. "The worst is over for GDP growth. We ex­pect growth to nor­malise grad­u­ally over the next four to six quar­ters as the dis­rup­tive im­pact of ma­jor pol­icy changes fades," Stan­dard Char­tered said in its Eco­nomic Out­look in 2018 re­port. While the eco­nomic growth bot­tomed out af­ter slow­ing to a 13-quar­ter low of 5.7 per cent in AprilJune 2017, it saw growth re­cov­er­ing fur­ther to 7 per cent over the next few quar­ters. No­mura says In­dian econ­omy is ex­pected to wit­ness a sharp re­cov­ery in the Jan­uary-March quar­ter and its GDP growth is likely to be around 7.5 per cent for 2018. Also aid­ing the In­dian econ­omy will be the ex­ten­sion of global growth surge of 2017 into the new year. In­dia, which has long tended to move in sync with the rest of the world, was the only ma­jor econ­omy that didn't ac­cel­er­ate in 2017, thanks to twin ef­fects of de­mon­eti­sa­tion and GST. It is now ex­pected to gain speed this year. How­ever, it will likely take In­dia a few years to re­turn to GDP growth lev­els of 7.5 per cent and above (the econ­omy grew 7.9 per cent in the year ended March 2016). This be­cause of pri­vate in­vest­ment – a cur­rent weak point for growth – is likely to take time to im­prove. A big fac­tor would be how oil prices move. Over the past three months, crude oil prices have in­creased by about 28 per cent -- from USD 52.3 per bar­rel in Au­gust-end to around USD 67. In­fla­tion too has risen to breach the tar­get range. Higher oil prices not just threaten to fuel in­fla­tion, it may also lead to the widening of the cur­rent ac­count deficit - a mea­sure of trade and fi­nan­cial flows that shows how heav­ily a coun­try re­lies on for­eign­ers to fi­nance its spend­ing habits. In the im­me­di­ate term, the bud­get pre­sen­ta­tion on Fe­bru­ary 1 will set the agenda. Fi­nance Min­is­ter Arun Jait­ley will have to do some tightrope walk­ing as he seeks to ad­dress the chal­lenges of job cre­ation and ru­ral dis­tress, as well as con­cerns about fis­cal slip­pages given the ad­di­tional bor­row­ings and GST col­lec­tions fall­ing short of the tar­get. Will he slip back into pop­ulism, of­fer­ing give­aways and sub­si­dies in Modi gov­ern­ment's last full year bud­get be­fore na­tional elec­tions in 2019 is a ques­tion ev­ery­one is ask­ing? It re­mains to be seen how he pri­ori­tises the com­pet­ing ob­jec­tives of sup­port­ing growth and achiev­ing macroe­co­nomic sta­bil­ity. Any which way, the gov­ern­ment's hands are full. It has to con­tinue to re­spond to GST-re­lated is­sues of the com­plex tax struc­ture, higher rates and low com­pli­ance as well as en­sur­ing progress on res­o­lu­tion of stressed as­sets un­der the IBC and the bank re­cap­i­tal­i­sa­tion plan.

Fi­nance Min­is­ter Arun Jait­ley

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