India economy 2016: Big strides tumble amid hurdles
02nd January 2017, 12:00 Hrs
Headline: India economy 2016: Big strides tumble amid hurdles
It is no mean achievement when Indian economy flexed its muscles in 2016 and briefly nosed ahead of Britain -- its once colonial master. But the honour was fleeting as India quickly fell back to the sixth-largest position, with considerable headwinds from demonetisation and delay in GST rollout queering the pitch.
At the start of 2016, everything looked hunky-dory as the country took pride in being the world's fastest-growing major economy, but the momentum seemed to have petered out by the end of the year as spending took a hit and industrial activity faltered with the junking of 86 per cent of currency in circulation, leading to an across-the-board downgrade in growth projections.
The first half saw India being called the bright spot and rightly so -- in a world searching for growth engine. The government moved in to reconfigure its economic architecture through new institutional mechanisms like the one to tackle monetary policy.
But Brexit, protectionist signal from Donald Trump fresh from the surprise US presidential election win, the Syrian turmoil and an uptick in oil prices partly reversed some of the gains and capped 2016 as a tumultuous year.
The economic agenda for 2017 remains clear. Finance Minister Arun Jaitley needs to impart a big push to the economic activity in the budget coming up in a month -- through not just raising spending on socio-economic infrastructure but dealing with the fallout of the cash recall exercise.
The need of the hour is a 'feel-good budget that will give people something to look forward to while taking the reforms agenda to the logical conclusion, including a schedule for the landmark GST launch that can be honoured.
Once expected to overtake the UK GDP in 2020, the moment arrived early enough in mid-December on the back of a near 20 per cent drop in the value of the pound after the shock Brexit vote.
This squeezed UK's 2016 GDP to 1.87 trillion pound (USD 2.29 trillion) as against Indias USD 2.3 trillion (Rs 153 lakh crore). But the change of fortunes came when forex rates realigned and the UK economy stood at USD 2.3 trillion compared with USD 2.25 trillion of Indian economy as the year drew to a close.
The jury is still out as India is expected to bridge the gap in the new year even if it were to grow at a lower pace of 7 per cent and UKs growth is projected at no more than 2 per cent through 2020.Although economists are wary of comparing the relative size of economies using the volatile market exchange rates and prefer purchasing power parity instead, which adjusts the differences in local purchasing power, India's fifth spot behind the US, China, Japan and Germany speaks volumes.
The single-biggest spoiler was the cash ban, which has triggered fears of a blow to consumption, particularly in rural areas, with the dominant services sector being the worst hit. Also, industrial output and investment may feel the pinch which coupled with job losses and a drop in demand could add to the disruption.
Demonetisation also acted as a speed breaker in the planned take-off of the Goods and Services Tax, the biggest piece of reform since Independence, from April 1. States that saw their revenues being affected by demonetisation have stalled a consensus on supplementary legislations, and the April 1 schedule looks a tall order now.
But to give credit where it is due -- Prime Minister Narendra Modi and Finance Minister Jaitley -- there was never a moment that saw commitment to reforms slipping. After cleaning up the economic mess left by the previous UPA government, the Modi government has bitten the bullet and started carrying out tough structural and deeper reforms.
Despite this, private investments are still hard to come by in a big way and loans to corporate remained subdued throughout the year.
Gross domestic product, by some estimates, has slowed to 6.5 per cent in the third quarter, from 7.3 per cent in July-September.
The government is confident that these are only short-term blips, and in the long run, India is well poised to hop on to the higher growth trajectory.
While the economy grew by 7.2 per cent in the first half of the current fiscal, the Reserve Bank of India (RBI) downgraded projections for 2016-17 to 7.1 per cent, from the previous 7.6 per cent. Fitch too lowered it to 6.9 per cent from 7.4 per cent while S&P had slashed its projections of 7.9 per cent to 6.9 per cent even before the November 8 demonetisation announcement.
WHEN EVERYTHING LOOKED GOOD
At the start of the year, the economy switched to top gear and kept going steady until the last two months when spendings took a direct hit after demonetisation
The government moved in to reconfigure its economic architecture through new institutional mechanisms like the one to tackle monetary policy
Finance Minister Arun Jaitley needs to impart a big push to the economic activity in the budget coming up in a month -- through not just raising spending on socio-economic infrastructure but dealing with the fallout of the cash recall exercise
India is expected to bridge the gap in the new year even if it were to grow at a lower pace of 7 per cent and UKs growth is projected at no more than 2 per cent through 2020
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