Indian Economy Ahead in 2018 – Still the global engine?

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Year 2017 was a very contrast year for Indian economy.

While the markets were bullish for the maximum time of the year, with demonetization and GST, the economy takes a back seat to make way for reforms.

While India was able to change the mood of Moody’s to achieve a better rating, S&P were still conservative.

While the ease of doing business took us 30 places up the ladder, the jobless growth coupled with demonetization and GST pulled the economy down the ladder.

While Oil and inflation were maintained at sub optimal levels, the govt. had to plan to infuse around 2 lakh crores in the banking and financial system to address the issue of rising NPAs.

What about 2018? What drives India ahead?

Until now the macro variables of the Indian economy have pushed us upwards. The micro variables did not have a proper recovery owing to the double blip of Demonetization and GST.

The good part was, we were able to kick in some good reforms with – RERA, Insolvency and Bankruptcy Code, GST etc. The windfall gains from low global commodity prices also helped us contain our fiscal deficit. But this was 2017.

With the onset of 2018, we are awaiting 8 major state elections, and central elections in 2019. As per the predictable trend, all the previous governments have had a populist budget strategy to woo the voters.

Also, the situation is easing out for bricks and mortar businesses, and with GST amendments coming in, the consumer spending should improve.

With ‘Bharatmala’ and ‘Indradhanush’, the government is also sticking to infrastructural spending and moving the wheels to create employment and infrastructure. This will help the informal sector, which accounts for more than 60 percent of the employment. The informal sector was the worst hit after demonetization and GST.

Reports have also been coming in where it is being said that India is poised to be the fifth largest economy in the world in 2018. “Despite temporary setbacks India’s economy has still caught up with that of France and the U.K. and in 2018 will have overtaken them both to become the world’s fifth largest economy in dollar terms”. Cheap energy and a digital revolution will drive economic growth globally, says CEBR deputy chairman Douglas McWilliams.

The world economic league table has forecast for 192 countries including India. It says that India will become the world’s third largest economy by 2032. Indian infrastructure projects will rebuild the world's most populous country, which will spend an amount as large as Canada's GDP on infrastructure. Key projects include the Delhi-Mumbai Industrial Corridor, the Indian Smart Cities Project, and more than 80,000 km of new highways. The forecast also said that by 2030, three of the world’s top four economies will be Asian –China, India and Japan.The growth in the Indian economy will also drive the rest of South Asia.

And as far the micro economic variables are concerned - Growth did slumped to 5.7% for the first quarter in 17-18 but recovered slightly to 6.3% in the second quarter. The manufacturing PMI rose to 54.7 in December from 52.6 in the previous month. Exports grew at a six-year high of 30.5% in November while the index for core sectors expanded at its fastest pace in 13 months at 6.8% during the same month.

So the path ahead looks good but of course with a word of caution.

The biggest challenge will be to contain the fiscal deficit target.With the current election results from Gujarat, the distress in the rural and agrarian sector is clearly visible. Electricity for all by 2022 isn’t going to help up in the state elections this year either. So populist measures is almost an imminent situation. They will only pile up in the deficit. The government also plans to go in for additional market borrowings of Rs50,000 crore. The latest data showed that the government’s fiscal deficit reached 112% of the full-year target during April-November 2017.Most analysts now expect the government to breach the fiscal deficit target of 3.2% of GDP in the current year.

The RBI is also expected to keep the monetary policy tight or even unchanged for the better part of the year. This also affects the leveraging ability of the government.

India's socio-economic set-up is on the verge of a new split between the financially secure and economically insecure population. This economic division is shaping up India's demography and geography.The looming demographic-economic split is the result of Indianpolitics’ famous rhetoric of rural development. India's rural economy is now reeling under deflation (low food inflation) coupled with inadequate support price for crops and natural hazards. This overall leaves a very tight space for government to stick to its fiscal planning.

Also ahead, with India the whole world is waiting for the Oil price shock and the OPEC decision on crude oil output.

Goldman Sachs has lifted its Brent price forecast by $4 to $62 a barrel in view of commitment by oil producers to extend output cut until the end of 2018. This will create a new macroeconomic challenge for the government. The current account deficit could widen due to increase in crude import bills. Government’s fiscal position too could weaken, further resulting in the Indian rupee to come under pressure. This would result in investors to find another investment destination.

So it is a tricky situation at a very delicate moment for both, the ruling party and the country. While the country needs to push the reforms further, the ruling party had a recent rural development scare. So though the rulers push for control measures, it will be a matter of time again to notice the price our nation pays.