A Speed Bump on the Road of India's Progress

Tue, 3 Jan Pre-Open

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Data released recently by the finance ministry showed that India has retained its position as one of the fastest growing major economies in the world. The finance ministry also went on to state that during 2016-17 the economy has continued to consolidate the gains achieved in restoring macroeconomic stability.

We've all heard this 'growth' story before.. India's resilient growth amidst a global slowdown has attracted a lot of attention. But will 2017 see India moving towards a sustained 8% growth, the dream target of the Modi government?

To answer that, let us look at some issues that could derail the Indian economy.

The chief point to consider is fallout from demonetisation. The full extent of how the move to demonetise high-denomination currency will affect us will only become apparent only in the coming two to three quarters. However, 50 days later, access to cash is still scarce, and is expected to remain so until March, and despite the push for digital payments, this will have an impact on spending.

We can't tell yet just how badly India's gross domestic product (GDP) will be impacted, but the Reserve Bank of India (RBI) and ratings agencies, including Fitch Ratings and Morgan Stanley, have all predicted a downgrade. 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.

Then there's the problem of GST getting implemented before its October 2017 deadline. Differences between the centre and the states, especially over the sharing of powers, has delayed the final approval for supporting legislations for GST, a tax reform which will for the first time bind the country into a common market. As per an article in The First Post, gains from GST are always long term, and there will definitely be pain in the short term. This will be aggravated by the demonetisation. The article also said that GST is best implemented when the economy is on an upswing, not when it is laid low or in recovery.

Additionally, the investment environment in India is flagging. Private equity and venture capital investments in India dropped sharply in 2016 after hitting a peak in 2015, both in terms of volume and value, and are showing no signs of recovery. Meanwhile, higher rates in the US mean that debt earns better rates back home, and with the US being the biggest investor, the flow to emerging markets will slow down.

Finally, there's the problem of rising non-performing assets (NPAs). The issue has kept Indian banks in a sorry state. Recently, Tanushree Banerjee, co-head of research at Equitymaster, pointed out that banks have accumulated NPAs worth billions of rupees in the Equitymaster Research Digest (subscription required).

These are only some of the major concerns that are weighing on the Indian economy.

From the above, it doesn't sound to us like economic growth is going full speed ahead. The recent news may provide some room for optimism. However, if things keep on as they are today, India might lose its status of the 'world's fastest growing economy' in the long term.

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