For both critics and fans, 2017 belonged to Narendra Modi; will Gujarat slow down his reform juggernaut in 2018?

For both his critics and die-hard fans, the year 2017 belonged to Narendra Modi. This was a year when the NDA-government’s reform juggernaut finally crossed the GST hurdle, apart from what it was already doing, a series of incremental reforms and the full impact of demonetisation, announced in November 2016, played out in full across the economy opening room for both criticism and praise.

Politically too, the year 2017 was centred around Modi who singlehandedly gifted his party victory in a series of state elections including two crucial ones, Uttar Pradesh and Gujarat. Thus, the year showed Modi-wave continuing to work in favour of the ruling party. But, on the economic-front, 2017 was a painful one for the economy, a year of major disruptions. There were more pain points in the economy visible at this juncture.

Firstly, the continuing impact of note ban-resulted cash crunch and disruptions caused by the GST in the economy was visible this year. The economy slowed in five successive quarters before showing a pick-up in the July-September quarter to 6.3 percent from 5.7 percent in the preceding quarter, spurred by a jump in manufacturing.

PM Narendra Modi.

PM Narendra Modi.

Various macro-economic data inputs (industrial production, vehicle sales, consumer confidence surveys) suggest that economic recovery is yet to happen in a significant way. To be sure, contrary to what a section of critics believe, the slowdown wasn’t necessarily triggered only by GST and demonetisation, but had begun many quarters before with both global and domestic factors hampering demand in the Indian economy.

The demand–slowdown was further hit by the sudden onset of note ban that sucked out 86 percent of the currency in circulation in one go in late 2016. The impact turned visible in the subsequent quarters particularly causing more damage to the informal economy, a big consumer and employer to the workforce.

The segment constitutes about 40 percent of India's official GDP and employs more than 90 percent of India’s workforce. This is also where cash plays a major role in keeping the chain alive. When post note ban, the remonetisation process got delayed for few months, the biggest victim of cash-scarcity was this segment.

Secondly, the GST finally happened and put India in the club of a host of developed countries. Even with a multiple-rate structure and confusions arising out of implementation, a uniform indirect tax regime finally happened. The credit, certainly, goes to Narendra Modi government for building the much-difficult political consensus to make the biggest indirect tax reform in India a reality.

But frequent changes in rules, rate revisions and technical glitches made GST a nightmare to small traders. Though GST is expected to bring benefits in terms of compliance in the long-term, the government is facing a difficult situation in the immediate term particularly because the revenue collection trend has been disappointing so far.

November goods and services tax (GST) collection at Rs 80,808 crore -- the lowest since the new tax regime was introduced in July -- would complicate the budget calculations for the Narendra Modi government. The GST collections have been falling steadily over the months ever since the new tax regime was introduced in July. In October, the figure stood at Rs 83,346 crore, in September at Rs 92,150 crore, in August Rs 90,669 crore and in July Rs 94,063 crore.

Thirdly, the government is facing a difficult task in shaping the budget this year on account of less than expected revenue collections from GST, RBI dividend and with the prospects of additional expenditure to provide the promised economic stimulus to the economy. With the government set to borrow Rs 50,000 crore more this fiscal year, most economists expect the fiscal deficit target to breach 3.2 percent in the current fiscal year to reach around 3.5 percent.

Besides, the Narendra Modi government is set to launch its last full budget which means there will be political pressure to offer a handful of populist goodies this time. As mentioned in an earlier piece it will be interesting to watch how Jaitley manages to fix the budget math and work out his revenue projections. The monetary policy makers will be watching the budget closely, too. With revenue projections remaining tricky, the MPC (monetary policy committee) will be making a mistake by tinkering with rates without knowing which way the wind is blowing.

Along with other factors, mainly the pick-up in the retail inflation, the risk factors loom large for the MPC to go for a rate cut in 2018. If inflation continues to inch up and other linked factors trigger risk, the MPC will be left with no option but to move on to a rate hike mode. Fourth, the banking sector mess deepened with gross NPAs of banks rising close to Rs 9 lakh crore. The introduction of insolvency and bankruptcy code gave hopes of faster resolution of stressed assets in the banking sector but with huge chunk of bad loans is due for recovery, the problem remains.

The government offered a fresh lease of life to banks when it offered a Rs 2.11 lakh crore package to state-run banks, of which Rs 1.35 lakh crore will come through recapitalisation bonds. To what extent the bankruptcy code and the bail-out package will work in favour of the banking sector will be watched closely in the year 2018. Fifth, subsidy-reforms aided by Aadhaar progressed well during the year. Total DBT transactions, or the amount government transfers directly to citizens under various state-sponsored schemes, has reached Rs 84,802 crore so far in the current financial year (2017-18). That’s compared with Rs 74,707 crore in the financial year 2016-17, Rs 61,942 crore in 2015-16 and Rs 38,926 crore in the fiscal year before that.

In other words, within a period of four financial years, the DBT amount has more than doubled and in the current financial year, as the trend suggests, the amount might cross well over Rs 1 lakh crore as this Economic Times report suggests.

To sum up, from a reform perspective, Modi government has been pro-active on the reform front. Be it GST, subsidy rationalisation or banking sector reforms, the year marked good progress. But, on other hand, the pain points in the economy accentuated. One cannot expect the Modi-government to continue with the same pace on the reform-front ahead of 2019 General Elections, especially after the Gujarat poll results came as a shocker to the BJP leadership. To conclude, 2018 will be an interesting year to watch out for economy-observers.

(Data support from Kishor Kadam)

Updated Date: Dec 29, 2017 13:39 PM

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