As we bid goodbye to 2016, we cannot deny that the economic outlook is not as bright as we would have wished. The reasons are many.
Firstly, the great currency swap has created a cash shortage in the economy. The cash is not being replenished at the desired pace. Hence some of the consumption and investment expenditure is being postponed, held up, or worse, cancelled. This is a temporary phenomenon, and hopefully we will see a V-shaped recovery in the following quarters. The data shows that rabi sowing is in full swing, with farmers taking advantage of the plentiful pre-Diwali monsoon. Emergency arrangements enabling farmers to buy seeds, fertilisers and other inputs despite cash shortage seem to have worked.
The second reason for a cloudy outlook is the global dollar strengthening. If the exchange rate drops by even one rupee, India’s gross oil import bill goes up more than Rs 15,000 crore. Many other imports also become expensive. Oil prices have also started inching up internationally. So inflationary forces are already at play. This means interest rates do not have enough room to be cut down. As it is, the dollar interest rates have started rising. In this international scenario, India can’t be cutting rates, when US rates are actually going up.
The third reason— private investment sentiment is still tepid. Gross fixed capital formation, that part of the GDP that measures new capacity creation for future growth, has been stagnant or negative. It can be revived with public spending now, but sooner or later we need the private sector animal spirits to become active again.
The fourth reason for concern is the continuing problem of non-performing assets, i.e. bad loans in the banking sector. Much of this is a legacy problem, and is confined to projects in infrastructure, electricity and steel. The recent bankruptcy and insolvency legislation will go a long way in providing a speedy resolution to the NPA problem, or at least bring it within manageable limits.
The fifth reason for concern is foreign investors’ sentiment, and inflows into India. In the last fiscal year, India saw record dollar inflows in FDI, overtaking even China. But this fiscal, there have been heavy outflows from the stock and bond markets, caused mainly by the strong dollar and rising interest rates in the US. It will be a challenge to attract foreign inflows at the same pace as in fiscal year 2015-16.
Lastly, and perhaps most importantly, the big looming challenge is that of job creation and livelihood support. The pace of job creation has distinctly slowed down, where recently even one of India’s biggest engineering firms announced a layoff of 14,000 personnel. And new avenues are not opening up at the pace needed to encash India’s promised demographic dividend.
The Union
Budget for fiscal year 2017-18 will be presented one month earlier, which is a significant break from tradition. It will also be the first time that no separate budget will be presented for the Railways. This is also a year when midstream, a new tax regime will be unfurled, namely the Goods and Services Tax. Since GST monies are distributed by a pre-determined formula, the Budget will have to make assumptions about when exactly the GST would be rolled out. Given some issues still remain unresolved in the GST council, this represents a challenge to the finance minister.
Source: newindianexpress.com