Waiting to see what govt does

Most analysts expect our economy to grow between 7 and 7.5 per cent this year, against less than 7 per cent last year

The new year begins with a lot of optimism, tinged with some anxieties. Optimism from expectation of higher economic growth and fewer disruptive events. Anxieties from global uncertainties and a government under pressure at home.
 
Most analysts expect our economy to grow between 7 and 7.5 per cent this year, against less than seven per cent last year. The effects of major disruptions due to demonetisation and hasty rollout of the Goods and Services Tax (GST) regime are waning, although slowly. The government is unlikely to indulge in any more disruptive measures during this pre-election year. Prospects of revival in domestic demand and private investment in new or expansion projects look better than last year.

 
Expectations that global economic growth will reach four per cent next year are quite high. The US economy goes into 2018 with strong growth momentum and an unemployment rate already quite low. Euro-area growth could show continued momentum, driven by stronger consumer and business sentiment, and lower than expected unemployment. Asia might see another year of strong growth. 
 

Uncertainties in the global economy have more to do with chances of an uptick in global commodity prices that might prompt the authorities toward tighter monetary and fiscal policies, that in turn could moderate growth somewhat. Beside, unexpected political developments in West Asia and East Asia cannot be ruled out. These anxieties are somewhat muted in the overall context; generally; the sentiment is upbeat, as the stock markets show.

 
A clear message from the electoral verdict in Gujarat is that people cannot be taken for granted. Job creation in our economy is not sufficient to provide enough opportunities to youngsters. So, the government is under pressure to deliver on promises. The full effects of GST’s messy implementation have not yet played out. So far, the government has been reacting to developments. The latest figures indicate a fall in revenue collection. Demands for farm loan waivers and increased spending on defence, infrastructure and the social sector are getting louder. At the same time, the powers of the central government to raise revenues through higher GST rates have gone to the GST Council.  Direct tax rates have to be made attractive for global investors. Given these constraints, a lot depends on how the government responds to the situation and finds money for increasing public investment.  

 
Exports can do better this year, with increase in the entitlements under the Merchandise Exports from India Scheme and Services Exports from India Scheme in the first part of the year. However, the government must expedite the pending refund of taxes to exporters and let them access inputs without GST payment. Also, if foreign exchange inflows in the equity and debt markets continue to be robust and the rupee to strengthen, the competitiveness of exporters might get eroded.
 
So, the Union Budget early next month acquires added significance. The fiscal deficit target might be breached. Many amendments to GST and allied laws are expected. As usual, the Budget speech will contain a number of impressive announcements and draw praise from analysts. We have to wait and see whether these translate into actions and desired outcomes. Any government under pressure is more likely to over-react and make mistakes. That should be a source for worry.   E-mail: tncrajagopalan@gmail.com