EDIT: An un­cer­tain new year

2017 was about dis­rup­tions; will 2018 bring sta­bil­ity?

Business Standard - - FRONT PAGE -

In­dia started 2017 hav­ing just un­der­gone one ex­tremely dis­rup­tive event — de­mon­eti­sa­tion — and half­way through the year had to deal with an­other, the in­tro­duc­tion of the goods and ser­vices tax, or GST. This has, thus, been a pro­foundly un­usual year for the In­dian econ­omy. It has been marked by dy­nam­ics such as de-stock­ing and re-stock­ing, which con­ceal the trend line of eco­nomic ac­tiv­ity. In the mid­dle of the year, it ap­peared that In­dia had un­der­gone a clear growth slow­down, with sev­eral suc­ces­sive quar­ters of de­cel­er­a­tion, be­gin­ning with the first quar­ter of 2016. It is to be hoped that the econ­omy has now bot­tomed out, but sus­tained high growth looks some­what dis­tant nev­er­the­less; the prob­lem be­ing there is not yet any clear sign of a re­vival in pri­vate in­vest­ment. The gov­ern­ment showed some en­ergy later in the year when it came to im­ple­ment­ing al­ready-an­nounced re­forms like the GST and the bankruptcy reg­u­la­tion. This en­ergy must be sus­tained well into 2018 if solid eco­nomic re­sults are to be seen on the ground.

Po­lit­i­cally, 2017 saw the Bharatiya Janata Party con­sol­i­date its po­si­tion with vic­to­ries in sev­eral state elec­tions. The thump­ing ma­jor­ity it re­ceived in Ut­tar Pradesh led many to think that it had se­cured its po­si­tion go­ing into 2018, when the cam­paign for the next gen­eral elec­tion in early 2019 will be­gin. To­wards the end of the year, how­ever, its un­ex­pect­edly nar­row vic­tory in Gu­jarat was seen as a warn­ing sign. Ru­ral dis­tress has per­sisted and this will, al­most cer­tainly, have im­pli­ca­tions for gov­ern­ment pol­icy in 2018. It is to be hoped that in­ter­ven­tions in­tro­duced to tackle this grow­ing ru­ral dis­en­chant­ment will be for­ward-look­ing, ef­fec­tive, and pru­dent. The loan waivers that were a fea­ture of state-level pol­i­tics in 2017 are not the way to go.

Go­ing for­ward, it is im­por­tant to note that one ma­jor tail­wind for growth — the fall in global crude oil prices — re­versed di­rec­tion in 2017. If the trend of higher oil prices sus­tains it­self for some more time, the im­pact on In­dia’s macroe­co­nomic po­si­tion will be sig­nif­i­cant. It is true that sharp in­creases in ex­ports in the most re­cent data sug­gest that, at least, world de­mand is pick­ing up and the GST’s im­pact on ex­ports has not been as de­bil­i­tat­ing as feared. Nev­er­the­less, macroe­co­nomic vari­ables will re­quire greater at­ten­tion in 2018 than they have needed to re­ceive over the past cou­ple of years. The Re­serve Bank of In­dia clearly fears that in­fla­tion is mov­ing up­ward again.

Stick­ing to the path of fis­cal con­sol­i­da­tion looks dif­fi­cult in 2018 as the risk of the gov­ern­ment breach­ing its fis­cal deficit tar­get of 3.2 per cent of gross do­mes­tic prod­uct (GDP) in the fis­cal year end­ing March 2018 has in­creased sig­nif­i­cantly af­ter it exhausted 112 per cent of its full-year tar­get by Novem­ber-end it­self. State gov­ern­ments have also shown a will­ing­ness to spend be­yond their means. Be­sides, mul­ti­ple sources of sov­er­eign or quasi-sov­er­eign debts have flooded the mar­kets, and the ap­petite for such pa­per from mu­tual funds has been able to com­pen­sate for this only par­tially. While the stock mar­ket has boomed in 2017, the ques­tion is whether the move­ment from in­tan­gi­ble to fi­nan­cial as­sets con­tin­ues in 2018. Over­all, the com­ing year is one in which a mod­er­ate growth re­cov­ery might be seen in the first few months, but macroe­co­nomic vari­ables may once again oc­cupy cen­tre stage.

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