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Five key developments that will shape Indian economy this year

03 January, 2017

2017 is likely to be a year in which the government’s resolve to make India a “less-cash” economy will be tested, and so will its efforts to weed out black money from the system. It will also be a year during which India will most likely implement an overhauled indirect tax regime. Politically, too, Prime Minister Narendra Modi’s regime faces a litmus test as several key states, including Uttar Pradesh, go to polls this year.

Here’s a list of key developments in 2017 that will have a far-reaching impact on the economy.   

A tax-friendly budget

This is a year of at least two firsts, as far as the annual budget is concerned. Not only has it been brought forward by a month, but there will be no separate railway budget as well–a norm followed since pre-independence times. 

However, the budget will be keenly watched for other reasons as well. First, it comes on the heels of the government’s November 8 demonetisation of Rs 500 and Rs 1000 notes, which made up 86% of the currency in circulation. Second, it would be presented just months ahead of the likely rollout of the Goods and Services Tax (GST). With demonetisation clearly disrupting India’s cash-dependent economy, finance minister Arun Jaitley is expected to offer tax sops to the salaried and middle class, who have been impacted by demonetisation the most. 

The budget will also likely focus on greater public spending, both in urban infrastructure and the farm sector, considering how badly the urban poor and the rural economy have been hit. Already, media reports suggest that a reordering of the tax slabs could be in the offing. Budget making, however, is a secret exercise and accurate details almost never become apparent till the finance minister delivers his speech on the budget day.

GST rollout

The GST will completely overhaul India’s indirect tax structure, and while it will be revenue-neutral for both the Centre and the states, it will make some goods and services dearer, at least in the short term.  

The current political deadlock, which has stalled legislative business in the Parliament, has ensured that the rollout will most likely be pushed back. A report in the Mint newspaper says the implementation is likely to be delayed by two or three months to either 1 June or 1 July, instead of the April timeline the government had been working on. That could be good news for the industry in general and the trading community in particular, as people will get enough breathing space to deal with the aftermath of demonetisation before they transition into a new tax system.      

Economic impact of demonetisation

The full extent of the move to demonetise high-denomination currency will become apparent only in the coming 2-3 quarters. 

While it is too early to accurately predict how badly India’s gross domestic product (GDP) will be impacted, the Reserve Bank of India (RBI) and ratings agencies, including Fitch Ratings and Morgan Stanley, have all predicted a downgrade. While the RBI feels that GDP growth rate will come down to 7.1% from its earlier prediction of 7.6%, Fitch and Morgan Stanley have lowered their forecasts to 6.9% and 7.4%, respectively.   

Expect retail inflation to go down further, and the RBI to cut interest rates by at least 25 basis points in February. (One basis point in one-hundredth of a percentage point.) However, the fall in inflation could be mitigated by the prospects of hardening global oil prices following a deal reached by the Organization of the Petroleum Exporting Countries (OPEC). Also, expected rate hikes by the US Federal Reserve throughout 2017 could see institutional investors move out of emerging markets like India.

Cashless or a ‘less cash’ economy

Although the Modi government initially sold demonetisation as a surgical strike on black money, once it saw that most of the currency in circulation was set to come back, it shifted the narrative to a ‘cashless’ or a ‘less cash’ economy as justification for the move, which dealt a heavy blow on India’s informal economy. 

Expect the government to continue this push in 2017. In fact, finance minister Arun Jaitley has already indicated that not all of the Rs 15.44 lakh crore may be pumped back into the system, necessitating a greater reliance on cashless methods. So, expect the advertising blitzkrieg on the digital push to continue, perhaps even intensify, in 2017.  

The next strike on black money

Prime Minister Narendra Modi has said on more than one occasion that demonetisation will not be the end of his government’s crusade against black money, and that the next attack could be on so-called ‘benami’ properties. Besides real estate, in 2017, expect the government to surveil high-end consumption. Already, at least one report by India Today says that all those who bought cars after 8 November will be sent tax notices, asking them to clarify their source of income. This could extend to other high-value household goods and jewellery.

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Five key developments that will shape Indian economy this year

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