India poised for watershed year

Having sprung a surprise by outlawing 500 and 1,000 rupee notes to counter the black market, the prime minister Narendra Modi is weighing his up his next move aimed at revitalising the economy.

A notice is pasted at a shop stating the refusal of the acceptance of the old 500 and 1,000 Indian rupee banknotes and acceptance of the new 500 and 2,000 Indian rupee banknotes in Allahabad, India. Jitendra Prakash / ReutersShow less

Indian business leaders are cautiously optimistic on the outlook for India’s economy this year, with factors ranging from Donald Trump to demonetisation expected to be key.

“The year 2016 was a year of surprises in terms of global economic and political events from Brexit to the US presidential election and Indian demonetisation,” says Srividya Kannan, the founder and director of Avaali Solutions, a consulting firm based in Bangalore. “The economic outlook for India for 2017 is quite optimistic. India is likely to be one of the faster growing economies, despite the slowdown expected because of demonetisation.”

The fallout of prime minister Narendra Modi’s demonetisation move, with India unexpectedly banning 500 rupee (Dh26) and 1,000 rupee notes in an effort to crack down on the country’s widespread problem of black money is still very much in focus, as the economic impact is assessed. It is believed that the challenges caused by the measures could continue over the coming months.

The Asian Development Bank is predicting that India’s GDP will grow by 7.8 per cent this year. It recently cut its estimate for 2016 to 7 per cent from an earlier forecast of 7.4 per cent, citing demonetisation and weakness in the agricultural sector. But it says that the impact of demonetisation is expected to be “short-lived” and it kept its forecast for this year unchanged.

Other analysts are also optimistic that the impact of the measures will not last too long.

“The government’s demonetisation measures will lead to some weakness at the beginning of the year, but we expect growth to recover due to a rebound in consumption and a pick-up in investment,” says Shilan Shah, the India economist at Capital Economics. “Looking ahead, the currency shortage will continue to hamper activity in the early part of 2017. However, we expect demand to recover gradually.”

Meanwhile, there are other factors on the horizon that are expected to help boost India’s economy. The most eagerly awaited reform of this year by far is a new goods and services tax (GST) which is set to be launched. GST is a single tax designed to replace the convoluted system of different taxes across states in India, effectively transforming the country into a common market.

The tax regime was first proposed a decade ago, but political wrangling delayed its progress and it was seen as a major victory for Mr Modi when the bill was passed by parliament last year. Forecasts suggest that the new tax regime could add as much as 2 per cent to India’s GDP.

“GST will be India’s biggest tax reform yet and any and every organisation is looking forward and preparing for it,” says Virender Jeet, the senior vice president of technology at Newgen Software, an IT company headquartered in New Delhi.

“As our country prepares for the new tax regime, everyone is racing against time to be GST-ready. GST will completely transform the way business in India happens.”

The main concern now is when it will be introduced. It was thought that it would be rolled out on April 1, but it is now widely expected to be delayed by a few months.

There are hopes that the government’s proactive approach could be a signal that there are more big ticket reforms to come this year.

“Many have suggested that this is evidence of the reform agenda gaining momentum, which would bode well for another good year in 2017,” says Mr Shah. “The government must now refocus its attention on two other key areas – the labour market and land acquisition rules.”

But he warns that with a slew of state elections scheduled to take place this year, including in Uttar Pradesh, potentially politically sensitive economic reforms could end up being shelved.

“The emotive nature of labour and land laws means that both could be used by opposition parties as a campaigning tool.”

Along with these factors, there are a number of global events, as well as things closer to home that are to impact Indian stock markets and the rupee.

“The Indian markets will be guided by factors including US government strategy to grow its economy, the crude oil price trend, news from the euro region related to Brexit, German election results and clearly growth stimulus provided by the Indian finance minister through the presentation of the union budget,” says Shashank Khade, the co-founder and director of Entrust Family Office Investment Advisors, an investment advisory firm.

India is very much dependent on oil imports, so any rise in price would add to the county’s fuel bill and trade deficit.

This year, India’s budget will be presented earlier, on February 1, in a move away from the colonial tradition of it being presented at the end of February. Relief on taxes is being widely anticipated.

The budget, as well as global factors could be critical for the already weakened rupee, which is currently trading at about 67.80 against the US dollar, could fall further and “is likely to trade in the 67 to 71 range to the dollar in 2017”, according to VK Vijayakumar, the chief investment strategist at Geojit BNP Paribas.

He adds that while they think that “GDP and corporate earnings will take a hit in the third quarter and fourth quarter” of the current financial year, which runs until the end of March”, they “expect growth and corporate earnings to rebound” from April.

India’s economy is heavily reliant on trade relations with other countries.

“On the global front, no other individual has managed to gain the public limelight like Donald Trump,” says Shishir Baijal, the chairman and managing director of Knight Frank India.

“We need to wait until the new government formalises its policies on various issues including outsourcing, to understand which way the wind blows particularly for India. The EU is a rather protectionist market and several Indian business entities choose to invest in the UK, with a view to get unrestricted access to the European markets. The scale of this [Brexit] effect, especially in the medium to long-term, will depend on the outcome of negotiations on the UK’s exit.”

India’s banking sector, meanwhile, which has been under severe pressure because of current record levels of bad debt, could have a more positive year in 2017, bankers say.

“The ongoing demonetisation exercise will incentivise financial inclusion, moderation in currency in circulation will help lower cost of handling cash,” says Rana Kapoor, the managing director and chief executive of Yes Bank.

“The bankruptcy framework will help ensure in a quicker resolution of stressed assets, and the GST framework will lead to further formalisation of the economy while also stimulating both consumption and investment,” he says. “Even as the overall domestic macro situation improved in 2016, the banking sector continued to face challenges due to lack of recovery in asset quality, capital constraints and sluggish profitability. Nevertheless, I firmly believe that 2017 will be the inflexion year for the banking and finance sector with support from the policy and regulatory environment, as improvement in macros start to gradually manifest in the balance sheets of corporates.”

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