Economic prospects to improve only in the medium term
ExpErts ExpECt HICCups oF HIGHEr InflAtIon DuE to GST AlonG wItH tHE onGoInG CAsH CrunCH.
The ongoing structural renovation which would prepare the Indian economy for better days ahead is, however, expected to slow down the pace of growth in the next financial year (FY18). The government’s demonetisation move aimed at expanding the base of the white economy and supporting such a base with an efficient taxation regime (GST) would increase the competitiveness and growth in the medium to long term. However, due to initial hiccups of higher inflation expected to be triggered by GST, along with the ongoing cash crunch, “there indeed is going to be some disruption in economic activity in the immediate term”, feels Dr A. Didar Singh, Secretary General, FICCI. Agrees Dr. Jaijit Bhattacharya, Partner at KPMG India, who thinks that 2017 would be more of a year of structural consolidation ( addressing banks’ NPAs etc.) and therefore “we might not see substantial growth in the next financial year (FY18). My personal view is that we are going to have 7.6% growth next year, but I am extremely sure that the Indian economy would cross 8.2% growth in FY19”, says Bhattacharya.
Many economists believe that half of (the calendar year) 2017 would be washed away in clearing the demonetisation dust which means that the ongoing contraction in demand would continue to be visible in retail, FMCG, auto, housing and other dis- cretionary spends. As regards residential real estate, Kotak Institutional Equities says that any potential fall in pricing (due to demonetisation) is unlikely to boost volumes because sales usually don’t pick up in a falling price environment. “Given that there is no precedence to the kind of demonetisation which we are witnessing, it may be difficult to quantify its overall impact on GDP growth,” says Dr. Singh. However, “our sense is that once the demonetisation phase is complete, GDP growth will get energised and we would see recovery”. A lot would also depend on banks’ ability to fund growth. Although demonetisation has helped banks to get huge low-cost deposits, addressing NPAs (bad loans) especially of public sector banks still remains a huge task. So “whether banks would be able to fund economic growth would depend on how aggressively the government goes after NPAs,” says Bhattacharya.
The government is well aware of the pain that demonetisation has caused to people and the economy as a whole. So economists feel that there is a strong case of lowering income tax rates for common tax payers as well as for corporates. More money with tax payers coupled with lower interest rates is expected to give a significant fillip to the urban demand that makes up over 60% of the GDP. And lower taxes for companies “would add to the investable surplus of the companies and support capital formation”, says FICCI.