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Outlook 2016: Five things to watch out for the economy

04 January, 2016

Perhaps the best way to describe 2016 is that it will be a year of realistic expectations. The year has started on a weak note with the stock markets falling nearly two per cent and data showing India’s factory activity contracted in December, indicating that the domestic economy is struggling to recover.

In fact, the mid-year targets released by the government late last year show some kind of reality check with the government expecting economic growth within the 7-7.5 per cent range, down from 8-8.5 per cent it had projected earlier.

So, what’s in store for the economy this year? Here are five things to look for.

GST bill and bankruptcy code

While 2015 had started with euphoria surrounding the new government and the pace of reforms, it fizzled out as the year progressed. With repeated disruptions in the Rajya Sabha, the upper house of parliament, the government couldn’t get major legislation approved.

One of the most awaited decisions of 2015 was parliamentary approval to the constitution amendment bill on the goods and services tax. While the government was able to pass the bill through the Lok Sabha, it could not get it ratified from the Rajya Sabha amid opposition protests over the revenue neutral rate and its inclusion in the bill. Clearing the bill will be an uphill task for the government as the opposition seems stuck to its demands.

“The GST has become more of a political issue as ideologically I don’t see too many issues regarding acceptance of its terms. We are a little more hopeful this year as it will come up in the budget session along with discussion on the budget,” said Madan Sabnavis, chief economist at CARE ratings. “But the time of implementation is unlikely to be in April and we may have to wait one more year.”

The bankruptcy code has a better chance of clearing the parliamentary hurdle as it is a money bill, which only needs ratification from the lower house where the government has a majority.

Crude oil

Crude oil prices touched 11-year lows in 2015, and this year will likely see some stability. With oil cartel OPEC refusing to cut output, prices are expected to remain low during the year. Cheaper crude helps India, which imports more than three-fourths of its requirement, to control its current account deficit.

Low crude prices will even help India keep its fiscal deficit in control as will lead to a drop in the government’s subsidy bill, Sabnavis said.

Capital flows

The year gone by saw a resurgence of foreign direct investment into India. Part of it was because India attracted global private equity and venture capital firms that were eager to be a part of the booming startup ecosystem. FDI inflows could increase this year after the government relaxed foreign investment limits in 15 sectors and started taking measures to make it easier to do business in the country. “We expect FDI inflows to improve in 2016, especially in sectors where we have not seen much traction in past,” said Arun Singh, senior economist at Dun & Bradstreet.

Foreign institutional investors were net sellers in Indian equities last year but they are expected to come back this year. A lot will depend, however, on the government’s performance and its ability to push through some important reforms. While in 2015 the US Federal Reserve rate hike played a huge role in prompting investors to go back to safe-haven assets, 2016 is expected to be much better as the Fed is widely expected to move gradually.

“Last year there were apprehensions about a lot of things. This year will be slightly better than 2015 from May onwards as post-budget there might be some improvement in growth as visible in the investment cycles and macroeconomic indicators,” Singh said.

Will Sensex hit 30,000 again?

India’s stock markets were on a see-saw ride last year, starting the year on a high note with the benchmark Sensex crossing 30,000. But the index ended the year 5 per cent lower. While India saw more IPOs and more than two-thirds of companies that went public posted positive returns, the performance was mostly backed by domestic investors. It was not just subdued foreign sentiment that played a part, but corporate earnings also disappointed.

Although 2016 has also started on a disappointing note, with Chinese stock markets hitting the circuit breaker on the first trading session of the year and the Indian markets falling 2 per cent on Monday, there may be a glimmer of hope given that the Fed decision is out of the way and FIIs may return.

KK Mittal, vice president at investment advisory firm Venus Capital said, that even if the government machinery works well and reforms are implemented, 30,000 will be a long shot for the Sensex. “We don’t expect much from corporate earnings, at least in the first half. While commodity prices are expected to help the manufacturing sector, the weaker rupee may offset some gains,” he said.

Budget, fiscal deficit, rate cuts

The markets would be expecting a reform-oriented budget this year, with the fiscal deficit and the rate cuts the other main talking points. “This [budget] will be make or break in terms of rationalisation of expenditure and allocation to key sectors. While the government may deviate due to elections in some key states, the budget will be more realistic as the government lacks the fiscal space to play much with expenditure,” said Singh of Dun & Bradstreet.

Another big worry is the fiscal deficit. While Singh, Sabnavis and Mittal all agreed that the government may achieve the target this year thanks to improved tax collections and lower expenditure, they noted that next year’s goal may be relaxed to 3.8 to 3.9 per cent from the planned 3.5 per cent of GDP given that the government has to meet its promises of one-rank-one-pension for defence personnel and higher wages for government employees.

HSBC economists wrote in a report on Monday that, as the impact of low oil prices and improvements in expenditure quality fade over the next year, new drivers will have to step in to support growth. “Higher consumption and progress in monetary transmission could fill the gap for a bit, but for a more solid performance, we’ll need to get quickly to the prime source: meaningful reforms,” the report said.

On rate cuts, economists don’t see much action this year after the central bank reduced interest rates four times last year by a total of 125 basis points. “Whatever has to happen will happen in the second half of the year after the budget. I don’t see more than 50 bps rate cut this year,” Mittal said.


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Outlook 2016: Five things to watch out for the economy

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