Asia's third-biggest economy is trying to shake off impact of sales tax and demonetisation
Indian businesses hopeful for an economic uptick in 2018
Business leaders in India are expecting the Indian economy to pick up pace in 2018 as it emerges from the upheaval caused by the introduction of a new sales tax and the fallout of a surprise demonetisation.
“Year 2017 was more of tough structural measures including demonetisation and general sales tax introduction,” says Subramanyam Sreenivasaiah, the chief executive of Ascent HR, a human resources management solutions firm, headquartered in Bangalore. “We expect the after effects of these measures being absorbed [in 2018] and begin to yield results in the form of an enhanced growth.”
These two particular structural changes are widely considered to be the biggest factors that have weighed heavily on the Indian economy this year.
Though there is light at the end of the tunnel and analysts are hopeful that 2018 is going to be far more promising.
“We remain bullish on the growth outlook,” says Sonal Varma, the chief India economist at Nomura, who expects the GDP growth to rise to 6.7 per cent in the fourth quarter of this year from 6.3 per cent recorded during the the third quarter of 2017. Nomura estimates a stronger rebound to
7.5 per cent in 2018.
The IMF’s projections for the Indian economy are in line with the Japanese lender. The fund estimates that India’s economy will recover to 7.4 per cent in 2018.
The consensus is that India ideally needs to achieve growth figures of around 8 per cent to create enough jobs for its population of about 1.3 billion.
Despite a slowdown this year, India is poised to overtake the UK and France to become the world’s fifth largest economy in 2018, according to a new report by the Centre for Economics and Business Research.
The introduction of goods and services tax (GST) in July – considered one of the biggest-ever tax reforms in the country – which replaced a variety of taxes levied across different states with a single system – has had a huge impact. Businesses have struggled to transition to the new tax regime. Smaller businesses, in particular, have been hit hard as they are still coming to grips with filing processes and rates under the GST. In the longer term, however, a subsequent increase in tax revenues is expected to give the economy a boost, according to analysts.
Meanwhile, demonetisation – a surprise move by Indian prime minister Narendra Modi, banning the two highest value bank notes from circulation in November 2016 – adversely impacted growth in 2017, strained liquidity in the market and affected consumer sentiment negatively.
Those favouring the move argue it has long-term economic benefits as it discourages black money flows, however, many question the effectiveness and the results of the policy reform.
“The introduction of GST and demonetisation, could always create initial challenges but will show positive traction to businesses and industry in years to come,” says BVR Mohan Reddy, the founder of Cyient, an engineering services company in Hyderabad.
Moody’s Investors Service’ recent rating upgrade for India “is an early sign of positive growth in economy in the coming quarters”, he said.
The US ratings agency in November upgraded India’s sovereign rating for the first time in almost 14 years and changed its outlook from stable to positive, citing the reforms by the Indian government, which it said, would ultimately help the economy. The World Bank’s latest report also showed India has climbed in its ease of doing business rankings to 100 from 130.
However, all is not rosy for the subcontinent’s economy and there are some concerns as India enters the new year. Last week, the government’s announcement of plans to borrow an extra 500 billion rupees (US$7.79bn) through bonds, prompted worries about the country’s fiscal deficit.
Among the factors that are expected to add pressure on the budget is the finance ministry unveilng more than 2 trillion rupees recapitalisation plan for the country’s ailing state-controlled banks. High levels of non-performing assets in India’s banks, which are proving to be a burden on economic growth and investment, will continue to be an area of concern for policymakers.
This month, the IMF warned the recapitalisation plan should be carried out alongside restructuring and, in some cases, privatisation of state lenders. The Reserve Bank of India expects the ratio of troubled loans portfolio in banking sector to rise to 11.1 per cent by September 2018 from 10.2 per cent in September 2017.
Measures such as increased spending on infrastructure, however, are expected to help stimulate the economy.
“Policymakers and other key stakeholders have been actively working on steps to boost growth, and to try and reverse the persistent economic weakness,” Anis Chakraborty and Umang Aggarwal, both economists at Deloitte India, write in their 2018 economic outlook report.
“For instance, there has been an increase in government expenditure over the past few quarters,” they say.
India has suffered “short-term growth pains” this year and there are other elements that can help boost the economy”, say the economists.
“In the coming quarters it is expected that apart from government expenditure, it is private rural consumption that is likely to drive growth. We also expect that investment demand might see a major turnaround in the quarters to come as market adjust to disruptions and risk appetite improves.”
Others, such as Rohit Manglik,the chief executive of EduGorilla, an Indian education technology company, say more reforms from New Delhi are on the cards .
“I foresee more government initiatives addressing the need for re-skilling in the country and giving a certain direction to the education sector and the economy as a whole.”
Among the factors likely to be closely watched in India are, key state elections (Meghalaya, Karnataka, Madhya Pradesh, Rajasthan) to be held in 2018, ahead of general elections in 2019, according to Mr Manglik.
This month, the ruling Bharatiya Janata Party won in Mr Modi’s home state of Gujarat, but it did not do as well as it was expected, prompting speculation the government may struggle to win votes in the new year.
The lacklustre performance may push the ruling party to focus more on areas such as farming.
“Today agriculture contributes around 17 per cent to India’s GDP but employs over half of the Indian workforce, so we can easily imply that agriculture currently is not as remunerative as the services sector is,” says Hanmantrao Gaikwad, the chairman and managing director of BVG Life Sciences.
“However, I see that changing in 2018, particularly with the renewed focus of the government on agriculture and allied sectors.”
Apart from political sensitivities, a rise in crude prices is another risk to economic growth in India, says Mr Manglik. India is heavily dependent on oil imports, so any increase in oil prices hurts India’s finances and adds to companies’ costs.
On the global front, there are several events to watch out for in 2018 that may have repercussions on Indian economy. Donald Trump’s presidency, the US trade policies going forward and Brexit could all have reverberations in India, according to Mr Manglik.
“The global scenario is not yet very positive and India would be looking inward more for growth and consumption,” says Mr Subramanyam.