For the Narendra Modi government, 2016 was expected to be a year in which it would look to consolidate its position and make some tough decisions ahead of several key state elections next year.
In August, the Modi government finally managed to pass the contentious Goods and Services Tax (GST) bill, a legislation which had been hanging fire for well over a decade. While the implementation of the new regime for indirect taxes from next year will provide a fillip to economic activity, the government also made a decision that could hurt growth—at least in the short term. The government in November demonetised 86% of the currency in circulation in a bid to fight graft and tax evasion, causing a severe cash crunch.
Here are the key economic highlights of the year gone by.
Demonetisation: The most significant decision affecting the economy came toward the end of the year when, on 8 November, Prime Minister Narendra Modi announced to a shocked nation that Rs 500 and Rs 1,000 notes, or 86% of the currency in circulation, would no longer be legal tender.
The move was initially billed as a “surgical strike on black moneyâ€, but the government soon shifted the narrative to a “cashless economyâ€. The government would have hoped that at least a third of the Rs 15.4 lakh crore it had sucked out of the system will not return to it, but with more than Rs 12.4 lakh crore back with the banks, either its estimates of black money stashed away were incorrect or people simply managed to launder most of their untaxed wealth, putting a question mark on the efficacy of the entire exercise.
Not only did people have to queue up for long hours, sometimes for days on end to withdraw their own money, the economy also took a hit. Most indicators, including inflation, captured after demonetisation show that demand had cooled off and industrial production had slackened. By all accounts, this pain is likely to continue for a few more quarters, and could especially hit the rural economy, which is almost entirely dependent on cash.
Passage of the GST Bill: This was a process that had been initiated by the last National Democratic Alliance (NDA) regime led by Atal Behari Vajpayee, but got caught in a seemingly never-ending political quagmire. Earlier this year though, parliament cleared the constitutional amendment for the GST. Once implemented, the GST will overhaul the entire indirect taxation system in the country.
With the subsequent ratification by more than half the states, and the ongoing deliberations of the GST council, the process of implementation has gone ahead. But a political logjam in parliament, following demonetisation, ensured that the government could not carry subsequent legislations, thereby making an April 2017 rollout almost impossible.
GDP blues: India remained the world’s fastest-growing large economy in 2016, but demonetisation may mean that might not hold out for much longer. In the July-September quarter, India’s gross domestic product (GDP) grew 7.3% as compared with 7.1% the quarter before, overshadowing China, which grew 6.7%. Yet, the current quarter, and at least the coming two quarters are likely to see subdued growth numbers.
India remained a hot destination for foreign investment as Foreign Direct Investment between 2000 and 2016 crossed the $300 billion mark this year, with a third of it coming via Mauritius.
Yet, none of this did much to revive manufacturing in the country, as India’s industrial production declined during the year. In October, the country’s industrial production shrank 1.9%, as compared with 9.8% growth a year earlier. The decline during the April-October period was 0.3%, despite a good monsoon and likely higher agricultural production following an increase in the area sown under the rabi crop.
Interest rates: While the year saw former Reserve Bank of India governor Raghuram Rajan come under a cloud of controversy over his reluctance to reduce benchmark interest rates (eventually resulting in him choosing not to see another term), the central bank did effect a 25 basis-point cut in October.
What afforded the newly constituted six-member Monetary Policy Committee under Rajan’s successor, Urjit Patel, enough legroom was falling inflation, led by a drop in food prices. In fact, following the 8 November demonetisation, there was speculation that the committee would again cut rates, but the central bank chose to hold out saying it did not yet have enough data to weigh in the exact impact of the move.
Meanwhile, the US Federal Reserve expectedly chose to raise interest rates for the first time since 2015, riding on favourable jobs data. This could put the Indian rupee under pressure as a favourable market in the US will see a flight of capital from emerging markets like India, especially in the light of the fact that the Fed indicated more rate hikes through 2017.
Oil prices: After remaining subdued since the second half of 2014, crude oil prices spiked following a December deal reached by the Organization of Petroleum Exporting Countries to cut production. On 23 December, crude prices closed at a 52-week high, with punters already reportedly betting on a $100 per barrel levels in the next few months.
India imports more than 80% of its annual crude requirement, and this spike saw retail oil prices perk up sharply in India in December. If this trend continues, 2017 could see a reversal of some gains the country made over the past two years. Not only could it negatively impact forex reserves, it could also add to inflation, especially retail prices.
Like this report? Sign up for our daily newsletter to get our top reports.
