Economy

Challenges of 2016 will spill over to 2017

Richa Mishra New Delhi | Updated on January 16, 2018

Cash crunch The year 2016 will probably be best remembered for the long, frustration-filled queues at bank and ATMs following the government’s demonetisation decision (file photo)

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The economy will find demonetisation impact, GST wrangles and other issues difficult to shrug off

Finance Minister Arun Jaitley and his team could well be seen ushering in 2017 with the baggage of 2016 — the after-effects of demonetisation, the issue of dual control haunting the move to bring in Goods & Services Tax (GST), and commodities prices, to name a few.

“There are two ways of looking at 2016: pure politics and politics over economics,” said a keen observer of the Indian economy.

Let us talk about politics over economics, which dominated the year, particularly since November 8, when Prime Minister Narendra Modi announced the decision to withdraw ₹500 currency notes and replace them with new ones, demonetise ₹1,000 notes, and introduce ₹2,000 notes.

Will it change the planning of Jaitley and his team as they prepare Union Budget 2017-18? Yes it will. Will it have an impact on India’s growth projections? Yes it will, though the government says any side-effects will be short-term.

One of the biggest fallouts of demonetisation is expected to be on the pace of economic growth.

Pace of growth

If thinktanks are to be believed, demonetisation will rob India of its ‘fastest growing large economy tag’ this fiscal — cash restrictions have hurt economic activity in the third quarter and thereby, growth in the short term.

While agreeing that short-term impact will be seen on GDP, manufacturing, the formal banking system and small traders, among others, those within the government believe that things will improve from next month.

GDP for the first half of the current fiscal was 7.2 per cent. The government, which is yet to come out with advance estimates for GDP growth for 2016-17, is confident that growth this fiscal will be around 7.5 per cent.

The RBI, however, has been more cautious. The central bank cut the GDP growth forecast to 7.1 per cent, from 7.6 per cent earlier, for the full fiscal, saying that short-term disruption in economic activity and demand compression arising out of demonetisation have led to downside risks to growth.

Banking sector woes

The weakness of the banking sector got further exposed post demonetisation, as it coped with huge queues at ATMs and branches, and the RBI rationed new currency allocation to them.

Besides a new RBI Governor — Urjit Patel — to preside over the industry’s NPA mess and tackle inflation, 2016 also saw various global policy shifts. These include a 25 basis point hike by the US Federal Reserve in December, strengthening the dollar and putting more pressure on emerging market currencies including the rupee.

There was capital infusion in banks but not all of them could get it, as the Finance Ministry rationed allocation on the basis of certain parameters.

India’s goods exports have stayed almost flat at $174.8 billion in the April-November 2016-17 period versus the corresponding period in the previous fiscal. This was despite the fact that exports last fiscal had fallen 15.8 per cent to a five-year low of $261.13 billion. The continued lacklustre performance of exports is due to lingering uncertainty in the global market with not much expansion in demand.

Imports of goods in the April-November 2016-17 period at $241 billion was 8.44 per cent lower than the same period last year.

While those endorsing the government’s policy moves agree that demonetisation has had its impact and that lack of consumer demand/spending are a concern, they believe that microeconomic fundamentals of the country remained on course.

Economists are unanimous in saying 2017 will prove to be a greater challenge than 2016.

The immediate challenges are the weak global demand in the near term, the twin balance-sheet problem (stressed financial positions of some large corporate houses leading to stressed assets of the banks, which may affect private investments), reviving the savings and investment cycle, and creating quality jobs.

Work in progress

All these are work in progress, said a senior government official, adding: “The government has taken some significant measures to boost growth.”

Some of the initiatives are: merging of Railway Budget with the General Budget; Constitution amendment Bill to enable GST law; measures like Make in India, Start-up India, Stand-up India, Skill India and Digital India that should improve investment scenarios; and institutional reforms including expenditure rationalisation, progressive elimination of leakages in public delivery system through stress on direct benefit transfers, and ease of doing business.

Jaitley, in his pre-Budget meeting with economists, had said: “India remains a bright point in the global economy — and BRICS in particular — despite the slowdown in global economy in 2016.”

Non-conventional Budget

He further said the Indian economy has made significant improvements, as growth in the country remains stable, and “we are in comfortable fiscal and debt situation.”

But, it remains to be seen whether Jaitley will follow the advice of some of the economists who suggested that this time the Budget should not be conventional, as these are not normal times. Rather, the government should make the best use of the opportunity arising from demonetisation to present a Budget full of out-of-the-box ideas; the focus should be on digital transactions to reduce dependence on cash.

(With inputs from KR Srivats and Amiti Sen)

Published on December 25, 2016

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