The year 2017 can be thought of as a year of transition during which India witnessed some major reforms as part of an ongoing attempt to affect consumer behavior. Growth in the country slowed down but India remained one of the fastest growing economies in the world. That said, while the domestic economy is in a recovery mode, the year 2018 will possibly put the focus back on structural issues such as inflation and the external account.
Two key initiatives that changed the playing field in quick succession in 2017 were the implementation of demonetisation, and the Goods and Services Tax (GST). These may be regarded as partially responsible for market uncertainty and the short-term growth pains. The period before and after the enactment of these reforms was marred with muted economic activity. The weakness (in the economy) is being characterised by agriculture slowdown, subdued manufacturing activity, substantial NPAs with banks and continuing sluggishness in private investment. In fact, in 2016, NPAs grew by a massive 90 percent from 22.8 percent in 2015.
In 2018, for growth to reach 7-7.5 percent range, both rural and urban parts have to do well. The rural economy has faced some stress over the last few years, and India is likely to see some measures in the upcoming Budget to alleviate the built up stress. Apart from this, the government will need to consider measures to attract private investment, which continues to be tepid.
The government investment currently is focused on developing infrastructure. A key initiative in this regard is the expansive 'Bharatmala' project aimed at developing close to 35,000 kilometres of roads at an investment of Rs 5.4 trillion in the next five years. The project should improve both the employment capacity and induce capital investments.
Private investment can be encouraged if constraints to credit supply are managed. A key step here is the bank recapitalisation plan. This plan, as it is implemented, can help banks get over the hangover of the NPLs and restart the muted credit cycle.
One of the most awaited policy announcements pertains to the government’s plan for fiscal deficit targeting. There are concerns that as the government spends to uplift the farm and the banking sector as well as boost infrastructure development, it may be at the cost of fiscal consolidation.
While tax revenues are falling, the news on the external front is also mixed with uncertainty about both FPI and FDI as the US economy rebounds and as the US goes ahead with tax reforms to funnel investment back into the country. Rising commodity prices, especially that of crude oil, also pose a risk to managing growth and inflationary expectations.
In effect, the real challenge will be in effectively managing any short-term disruptions whilst making well-planned and effectively administered policy decisions to guide the recovery process. The right short-term decisions must be taken keeping in mind the composition of fiscal expenditure so as to ensure that short-term successes do not have long-term costs.
Ultimately, as much as the vigorous public investment in infrastructure remains a factor for propelling overall growth, addressing existing inequalities and institutional obstacles to development while implementing policy reforms in an effective and time-bound manner, remains key.
Richa Gupta is a senior director while Umang Aggarwal is an assistant manager with Deloitte India.
Updated Date: Jan 25, 2018 16:48 PM