The year 2016 was a momentous one and not always for the right reasons. At the global level, the biggest event that rocked the world was the unexpected victory of Donald Trump in the US elections after an extraordinarily vicious and venomous election campaign against Hilary Clinton.
The other big event was Britain exiting the European Union; an event that closes another chapter of globalisation, at least the way we have come to understand it over the last two decades.
Haven of stability
The Indian economy, on its part, moved steadily along in 2016. In fact, India is seen as a stable economy amidst global uncertainty, and the government, not surprisingly, never lost an opportunity to drive home this point. Several investment banks and multilateral agencies, such as the IMF and the World Bank see India as a haven of economic stability.
There are no signs of the economic malaise in the EU abating and the US economy is still coming to grips with Trump’s victory. China, which for years did the heavy lifting for the global economy, is struggling to transition from an investment-led economy to a consumption-led one, with growth rates falling to the mid-six per cent range.
Demon of demonetisation
But then, the November 8 demonetisation blitzkrieg by Prime Minister Narendra Modi threatens to seriously derail the gains made so far.
Though one cannot fault the government’s objectives for combating the menace of black money, questions are being raised over the efficacy of demonetisation, given the severe economic disruption it has led to.
Also, the shockingly inept implementation of this policy, with the Finance Ministry and RBI tweaking the rules every day, has seriously dented the government’s credibility. The way the government has been ‘shifting the goalposts’ from combating black money to a ‘less-cash’ economy has come in for serious criticism.
Ratings agencies and global investment banks have already scaled down India’s growth forecast, and the short-term pain the government talks about may, worryingly, extend over a longer period.
The plus side
At the policy level, the passing of the GST Bill in the Rajya Sabha in May, in a rare act of bipartisanship, was perhaps the government’s biggest achievement.
The passing of the Bill, which was in a limbo for a long time, thanks to the political wrangling between the BJP and Congress, on the one hand, and the States on the other, was no mean feat. Of course, there are still some key issues — such as the tax rates, ‘dual control’ and compensation to the States — that need to be ironed out. In fact, the GST Council has been meeting over the last two days to reach a consensus.
But even here, the shadow of demonetisation looms as both the Kerala and Bengal Finance Ministers have raised doubts over meeting the GST deadline of April 1, 2017.
The passing of the Insolvency and Bankruptcy Code in May was another important achievement for the government. This will help in faster winding up of unviable businesses and create a database of wilful defaulters.
Economic indices
As far as the major economic indices are concerned, the economy logged 7.3 per cent growth in the second quarter. The RBI has, however, scaled down its 2016-17 growth forecast from 7.6 per cent to 7.1 per cent. But, as mentioned earlier, with demonetisation taking its toll, growth may fall further — Ambit Capital’s dire forecast for this year is 5.8 per cent. Nomura said on Thursday that given the currency note crunch, the RBI may have to further scale down its growth projections.
Industrial production has seen a see-saw-like ride over the last year. From a high of 9.9 per cent in October 2015, factory output contracted to (-)1.9 per cent in October 2016. Since January 2016, factory output has been in negative territory over five months, which shows weaknesses in the recovery process.
The discrepancy between the IIP data and growth figures has also led some to question the quality of data put out by the government. Chief Statistician TCA Anant had said the base year of 2004-05 may be a reason for the downward bias in industry output.
Exports
Given the global uncertainty, it is not surprising that exports have suffered in the last one year. Though there have been some signs of recovery recently, a major turnaround is unlikely because of the weak global sentiments. Media reports suggest that the government may be looking at revising its 2020 export target of $900 billion.
Retail inflation
There is some good news on the retail inflation front, with prices falling continuously since July 2016 and touching a low of 3.63 per cent in November, well within the RBI’s comfort zone. Food inflation has also touched a new low of 1.54 per cent in November, but pulses prices remain stubbornly high.
Despite falling inflation, however, the RBI has kept key rates on hold and did not oblige with a rate cut in its last policy review, which shows that it is still worried about inflationary pressures.
After years of stagnation, agricultural growth has looked up this year, posting a 3.3 per cent growth in the second quarter. But given our reliance on pulses imports, analysts have argued for a shift in focus from cereals to pulses. This is seen as being beneficial from the nutritional point of view too.
RBI in focus
Another major issue that hogged the headlines this year was the bad debts of banks, especially in the public sector. Former RBI Governor Raghuram Rajan led the crucial initiative of cleaning up the balance sheets of PSU banks. His unexpected exit from the RBI also made big news — rarely has an RBI Governor got such good press.
After months of uncertainty over his extension, Rajan threw in the towel in June. It is interesting to speculate how the demonetisation would have panned out had Rajan stayed on as RBI Governor.
Now, all eyes will be on the Budget, which will be presented a month earlier this time. To counter the impact of demonetisation, the government may want to increase capital expenditure. Whether it will have the fiscal space for that, especially with oil prices firming up, remains to be seen. Also, will Finance Minister Arun Jaitley ‘reward’ people with tax cuts for enduring the pain of demonetisation?