India’s economy took a big hit from the sudden, ill-prepared November 8 decision to withdraw a massive quantum (86 per cent) of money in circulation, and that now gets reflected in the global institutions’ growth estimates in fiscal 2017 and forecasts for the year ahead. It is time for the Modi Government to shift from a state of denial of contractions to repairing the social and economic damage from the disruptive ‘notebandi’ or “surgical strike” on honest millions.
IMF, in its January Update of World Economic Outlook (WEO), has cut its earlier estimate by one full percentage point to 6.6 per cent for 2016/17 and further revised down its forecast for 2017/18 also from 7.6 per cent to 7.2 per cent. It would be 7.7 per cent in 2018/19. The revisions are due to “temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative”, the Update noted.
Earlier, the World Bank had also lowered its growth estimate for 2016/17 to 7 per cent while adhering to 7.6 and 7.8 per cent for the next two years (2017-19). It cited “challenges associated with the withdrawal of a large volume of currency in circulation and subsequent replacement with new notes.”
And in the wake of demonetisation, we have seen how the whole financial system got disrupted, the autonomous status of the prestigious Reserve Bank of India demolished, and the people were made to lose faith in the banking system in general.
The World Bank’s assessment of growth impact was limited to the third quarter of 2016/17, and it may further revise growth estimates when data for the full year including the fourth quarter becomes available. While India remains the “fastest growing” economy, focus in IMF, World Bank and OECD Outlooks is mainly on China, the second largest economy, both as the lead engine in global growth as well as the inherent risks it poses during the rebalancing of its economy.
Interestingly, IMF’s revised estimate of 6.6 per cent puts India behind China’s 6.7 per cent in 2016. We are also behind Bangladesh’s 7.1 per cent in 2016, according to WB estimates.
All of this takes us to the challenges that Finance Minister Arun Jaitley now faces in framing his 2017/18 Budget (due on February 1). At best, he could target growth in the coming year at 11 per cent at current prices in making projections of revenues and expenditures. The Central Statistical Organisation has not so far come up with any advance estimate but revised down growth in 2016/17 to 7.1 per cent (GVA).
Inflation, however, continues to remain moderate, in a broad sense, especially with the repressed consumer demand affecting the crucial role of private consumption in the economy. It can also be confidently assumed that private investment, the major driver of the Indian economy, would not revive, for the fourth successive year of the Modi Government, short of a transformative budget that Mr Jaitley could seek to present.
Mr Jaitley has been asserting that all revenues are up and he has the fiscal space to adhere to the consolidation path at 3 to 3.5 per cent of GDP besides providing for tax cuts, apart from the poll-related sops that Prime Minister Modi announced in a New Year’s Eve speech, just ahead of the Election Commission’s announcement fixing dates for UP and other state elections.
Paradoxically, India has to get over a self-inflicted reversal and regain growth stability at a time the world economic activity has begun to pick up the pace from the second half of 2016. It could get a further boost with the projected fiscal stimulus in the United States. Despite some uncertainty surrounding the policy mix of the new Trump Administration, which takes over on January 20, IMF economists are factoring in all market indicators and continued appreciation of the dollar since November 8 election.
The US Federal Reserve which hiked the interest rate from January 1 has signalled a quicker sequencing of further hikes over the two years 2017-18. The rise in US interest rates and the firming of oil prices under way pose additional risks to India’s macroeconomic stability. The average price of oil in U.S. dollars a barrel was $42.7 in 2016 and the assumed price based on futures markets is $51.2 in 2017 and $53.1 in 2018.
According to IMF, growth prospects have marginally worsened for emerging market and developing economies. Near-term growth prospects were revised up for China, due to expected policy stimulus, but were revised down for some other large economies—most notably India, Brazil, and Mexico.
Indeed India could face more risks and vulnerabilities from the emerging picture of global outlook projected by IMF and the World Bank, though hitherto considered to be well-cushioned to manage spillovers. Tightening of financial markets and normalisation of monetary policy in the USA with speed-up in rate hikes could lead to more capital outflows that India had already begun to experience in 2016.
Added to these is the threat of protectionism which the US President-elect had threatened in relation to global imbalances resulting from trade with China. IMF sees adverse risks from inward-looking policy platforms and protectionism and tightening in global financial conditions due to balance sheet weaknesses in parts of the euro area and some emerging market economies.
India’s revised growth projections by IMF at 6.6 per cent in fiscal 2017 and 7.2 per cent in fiscal 2018, should be a matter of grave concern for the Modi Government which came to power in 2014 on the strength of promises in development and jobs creation. But a far more depressing picture of the post-demonetisation economy comes from the Centre for Monitoring Indian Economy (CMIE) with a 6 per cent average for the next five years, down from the pre-shock 7.5 to 8 per cent average.
(The views expressed are strictly personal.)