An uncertain new year

2017 was about disruptions; will 2018 bring stability?

India started 2017 having just undergone one extremely disruptive event — demonetisation — and halfway through the year had to deal with another, the introduction of the goods and services tax, or GST. This has, thus, been a profoundly unusual year for the Indian economy. It has been marked by dynamics such as de-stocking and re-stocking, which conceal the trend line of economic activity. In the middle of the year, it appeared that India had undergone a clear growth slowdown, with several successive quarters of deceleration, beginning with the first quarter of 2016. It is to be hoped that the economy has now bottomed out, but sustained high growth looks somewhat distant nevertheless; the problem being there is not yet any clear sign of a revival in private investment. The government showed some energy later in the year when it came to implementing already-announced reforms like the GST and the bankruptcy regulation. This energy must be sustained well into 2018 if solid economic results are to be seen on the ground.

Politically, 2017 saw the Bharatiya Janata Party consolidate its position with victories in several state elections. The thumping majority it received in Uttar Pradesh led many to think that it had secured its position going into 2018, when the campaign for the next general election in early 2019 will begin. Towards the end of the year, however, its unexpectedly narrow victory in Gujarat was seen as a warning sign. Rural distress has persisted and this will, almost certainly, have implications for government policy in 2018. It is to be hoped that interventions introduced to tackle this growing rural disenchantment will be forward-looking, effective, and prudent. The loan waivers that were a feature of state-level politics in 2017 are not the way to go.

Going forward, it is important to note that one major tailwind for growth — the fall in global crude oil prices — reversed direction in 2017. If the trend of higher oil prices sustains itself for some more time, the impact on India’s macroeconomic position will be significant. It is true that sharp increases in exports in the most recent data suggest that, at least, world demand is picking up and the GST’s impact on exports has not been as debilitating as feared. Nevertheless, macroeconomic variables will require greater attention in 2018 than they have needed to receive over the past couple of years. The Reserve Bank of India clearly fears that inflation is moving upward again.

Sticking to the path of fiscal consolidation looks difficult in 2018 as the risk of the government breaching its fiscal deficit target of 3.2 per cent of gross domestic product (GDP) in the fiscal year ending March 2018 has increased significantly after it exhausted 112 per cent of its full-year target by November-end itself. State governments have also shown a willingness to spend beyond their means. Besides, multiple sources of sovereign or quasi-sovereign debts have flooded the markets, and the appetite for such paper from mutual funds has been able to compensate for this only partially. While the stock market has boomed in 2017, the question is whether the movement from intangible to financial assets continues in 2018. Overall, the coming year is one in which a moderate growth recovery might be seen in the first few months, but macroeconomic variables may once again occupy centre stage.