Modi Own Goal Swamps India’s Big-Bang Year, Clouds 2017 Outlookby
Reforms carry long-term benefits, short-term risks: S&P Global
Cash ban hurting business confidence, holding back investments
India started 2016 as the world’s fastest-growing major economy, but at its end the nation faces a significant slowdown and the delay of what’s been hailed as Prime Minister Narendra Modi’s greatest reform -- the creation of an integrated marketplace.
Much of the pain is self-inflicted as Modi’s decision last month to drain 86 percent of currency in circulation stalled spending and caused a political stalemate on a landmark sales-tax reform. It’s an apt end to a busy year that’s included a change of guard at the central bank, the overhaul of a century-old bankruptcy law and the biggest battle to rock corporate India in decades. And it’s sown the seeds for a tumultuous 2017.
“Reforms will have long-term structural benefits but carry short-term execution and adjustment risks,” said Abhishek Dangra, a credit analyst at S&P Global Ratings. A move away from cash and the introduction of a uniform goods and sales tax across the country next year will be beneficial in the medium-term as it will drive higher tax collections, he said.
Here’s a quick tour of the biggest hits of 2016 and what to watch for in the year to come.
No Money, Just Problems
India’s cash ban is the center of attention. Early data back economists’ fears that consumption will be hit, particularly in rural areas, with the dominant services sector absorbing the bulk of the pain. Industrial production and investment are likely to be pressured with subsequent job losses adding to the disruption, according to economists.
Gross domestic product will grow 6.5 percent this quarter, slowing from 7.3 percent in the July-to-September period, according to the median estimate in a Bloomberg survey.
Priyanka Kishore, lead Asia economist at Oxford Economics in Singapore, has lowered her forecasts for 2016. Growth longer term, however, will be robust, said Kishore, who expects an average expansion of 7 percent a year in 2016 through 2019, slightly faster than the pace in 2013 to 2015.
A Common Marketplace
Demonetization has sucked momentum from the movement to roll out India’s goods and services tax from April 1. Hailed as one of biggest reforms in generations, the GST will replace a myriad of consumption and sales levies imposed by various states and is expected to boost competitiveness and investment.
Supplementary legislation on the GST stalled in parliament this month and unless the government garners consensus and passes supporting legislation in next few weeks, it will be difficult to meet the launch date. As it stands, another chaotic roll out lurks in India’s not-too-distant future.
Central Bank in Focus
India formally adopted an inflation-targeting framework in August, committing its central bank to tackling the politically-sensitive issue. For the first time, it also put interest rate decisions in the hands of a policy committee with external members. With inflation easing to a two-year low, the panel has room to ease rates in the first few months of 2017.
The economy isn’t the only thing the Reserve Bank of India must manage next year. The authority has come under criticism for its handling of Modi’s cash ban with policy U-turns adding to the chaos on the streets.
House of Tatas
On the corporate front, a public battle for control of India’s largest conglomerate has played out after family patriarch Ratan Tata replaced Cyrus Mistry as chairman of the Tata Group in October. Both men have traded accusations over missteps at the salt-to-software empire, bringing its governance structure into question.
As the year closed out, Mistry stepped down from the boards of Tata group units other than holding company Tata Sons Ltd. but vowed to continue his fight on a legal platform. Mistry has filed a case with the National Company Law Tribunal, with the next hearing set for Jan. 31.
India introduced a new bankruptcy code this year that’s likely to allow the quick closure of businesses gone bad and prevent the build-up of non-performing loans. Nevertheless, the Organisation for Economic Co-operation and Development says implementation will require an improvement in the nation’s severely back-logged judicial system.
Meanwhile, non-performing loans keep climbing even as banks approach a March 2017 deadline to clean up their balance sheets by increasing provisioning. The ratio of stressed assets in India’s banking system surged to a 16-year high of 12 percent as of June 30, RBI data show.
Investments in big projects and company loans have been subdued this year and economists see little chance of a recovery in coming months given the current economic uncertainty. “Investments were weak and that will not recover," said Gita Gopinath, an economics professor at Harvard University.