Prospects for the Indian Economy in 2018: Turbulence, Recovery, or Steady Growth?

The Indian Economy Quo Vadis in 2018

After the twin shocks of Demonetization and the GST or the Goods and Services Tax, the Indian Economy seems to have recovered and regained some of the momentum that it lost due to these initiatives. With growth returning to well above 6%, many economists aver that the Indian Economy is bouncing back and is on the road to recovery.

However, is this rosy picture justified on the basis of the statistics and parameters of growth as well as the situation on the ground? For instance, the gross capital formation has taken a hit and concomitant with lagging and slacking private investment, there are signs that the growth that is being reported is mainly on account of government spending.

Indeed, the fact that government spending can also not take the Indian Economy beyond a point is evident from the statistic that indicates that the Fiscal Deficit for the year 2017-18 has reached beyond 90%. Thus, any boost to growth from the government would not be sustainable in the year ahead.

Apart from this, the fact that inflation is creeping up again means that the RBI or the Reserve Bank of India has little leeway to cut interest rates which is already the case as seen from the recent announcements of holding rates steady.

This means that unless private investment and private consumption pick up, the buoyant growth that is being reported would fall flat in 2018.

Moreover, the fact that GDP or Gross Domestic Product that is the primary indicator of economic growth is being measured differently means that the growth figures that are being reported might not reflect the actual situation on the ground.

How Demonetization Slowed Down the Indian Economy

Indeed, Demonetization has already resulted in massive job losses in the SMEs or the Small and Medium Enterprises as well as in sectors such as construction.

Talking about construction, what is worrying is that the Real Estate Sector has grinded to a complete halt due to the fact that many real estate transactions in India are cash-based and given that Demonetization and subsequent policy initiatives are making large cash transactions difficult, it is difficult to see how much the Indian Economy can carry forward its momentum in 2018.

Structural Reforms Take Time

Having said that, it must also be noted that Demonetization and GST are structural reforms which take time to bear fruit must be kept in mind. Also, the fact that there is scope for reforms on the land, labor, and capital markets means that with enough political will, there can be sustained growth in 2018.

Of course, much will depend on the outcomes of the elections in several states that are going to the polls starting with Gujarat which is the home state of the Prime Minister. Indeed, any unfavorable verdict in these states can make the Central Government hesitant to implement Big Bang Reforms.

Need for Big Bang Reforms

Talking about Big Bang Reforms, there is no denying the fact that what the Indian Economy needs in 2018 is more game-changing reforms that can result in significant boosts to it. However, the fact that Demonetization and GST were intended to be Big Bang Reforms and yet, the results are not as transformative as one expected means that there are difficulties ahead regarding how much can the Indian Economy sustain its growth figures in 2018.

On the other hand, there are enough indications that the Indices such as Ease of Doing Business and other metrics have shown improvement means that there are some movements on the ground.

Indeed, the fact that pro-business states are undertaking reforms is one aspect that augurs well for the Indian Economy in 2018. However, the fact that Exports are shrinking means that there is an urgent need to introspect on this account.

Moreover, the IT or the Information Technology Industry that contributes significantly to Dollar Inflows is slowing down means that there might be worries on this account as well.

The Best of Times, the Worst of Times

Thus, there are challenges galore and similarly, opportunities aplenty which mean that with some well thought and efficiently implemented policies and reforms, the Indian Economy can indeed reach its potential and 2018 looks to be the year in which it sheds its inhibitions and moves forward. Indeed, the fact that 2019 is the Election Year makes the need for any reforms that much more urgent and politically impactful.

As can be seen from the discussion so far, these are the best of times and the worst of times for the Indian Economy, and it is our view that with reforms on the land and labor fronts, the Indian Economy can indeed grow faster in 2018.

The reason why we are harping on these reforms is that they represent the ultimate challenge as far as the economy is concerned and hence, we hope that with sufficient political will and push from industry, the Indian Economy can indeed blossom in 2018.

Conclusion

Lastly, the fact that Industry needs to do its bit in kick-starting the Indian Economy means that there is a need for all stakeholders to supplement and complement each other in ensuring steady growth actively. To conclude, there can be turbulence in the Indian Economy in 2018, or there can be a recovery in addition to the fact that the steady state situation is continuing and hence, depending on how the various factors discussed here play out, the outcomes would correspond to that.


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