Even as hope of the Goods and Services Tax (GST) bill being passed by the Upper House (Rajya Sabha) in the current winter session of Parliament continue to dwindle, in a recent report global research firm Nomura pegs the probability of GST being implemented in 2016 at 65%.
In a recent report titled ‘Asia 2016 outlook – Choppier seas ahead’, Nomura expects the Reserve Bank of India to keep rates unchanged in 2016. While economic reforms are likely to continue, Nomura believes, executive decisions are likely to take more of the spotlight.
The main focus will be on the government’s ability to implement the goods and services tax (GST), state elections in mid-2016 and redemptions of FCNR (B) dollar deposits in Q4 2016.
Nomura expects India’s GDP growth to rise from 7.3% in 2015 to 7.8% in 2016 and 8% in 2017, led by strengthening domestic demand. On the other hand, it expects CPI inflation to remain well above the RBI's 5% target in March 2017 and the 4% target in March 2018.
"Hence, we expect the RBI to keep policy rates on hold in 2016 as it has already delivered a cumulative 125 basis point cut in 2015. The pay commission recommendations have undoubtedly created upside risks to the RBI’s targets. With inflation expectations still elevated, a growth recovery underway and upside risks to inflation, we do not see any space for further easing. Weaker quality of fiscal consolidation also suggests less need for monetary policy to be more accommodative," Nomura said.
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Going ahead, it expects the RBI to focus on enabling greater monetary policy transmission by tackling the legacy impaired assets of the banking sector, making interest rates offered on small savings schemes market-determined and by moving to marginal cost-based pricing of loans.
Here are 7 reform measures that Nomura expects during 2016:
GST (probability of implementation in 2016: 65%): The goods and services tax (GST) is meant to simplify the tax regime by replacing a host of indirect taxes by a single unified tax. Once the GST Constitutional Amendment Bill is passed (requires a two-thirds majority), it has to be ratified by more than 50% of the state assemblies and then the revenue neutral rate has to be finalised (expected to be less than 18%).
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Strategic disinvestments (85%): The government is likely to fast-track stake sales in loss-making public sector companies, Nomura says, and expects a mechanism for identifying strategic disinvestments (privatisation) in profitable public sector companies.
Bankruptcy code (60%): The bill includes setting up an insolvency regulator and adjudicating authority, early identification system for financial distress, an insolvency database and a clear timeline and a procedure for resolving insolvency cases.
Infrastructure push (60%): Nomura expects an independent railways regulator to be set up and station redevelopment to be the major focus in 2016. For roads, the focus will be on the hybrid annuity model to accelerate construction to 30km/day from the current 18km/day. It also expects groundwork (greenfield or brownfield) for the development of 20 smart cities to begin. The Sagarmala project (ports) and the development of inland waterways should also progress further. That apart, Nomura expects the National Infrastructure Investment Fund to buy stressed projects in 2016.
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Banking reforms (80%): Deregulation of small savings rates, privatisation of IDBI Bank and repos in the corporate bond market are all possible, the Nomura reoport says.
Labour reforms (70%): It expect amendments to the Child Labour Act (prohibiting employment of children under 14 years), the Factories Act (exempting factories with less than 40 employees from 14 labour laws, including easier shutdown) and an increase in the size of the employers provident fund.