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Four things to look forward in 2018
The curtain is falling on 2017, a watershed year for the Indian economy; a year that saw the government subsume a raft of indirect taxes under the Goods and Services Tax (GST) and infuse life into banks on life support. Reams of reports have been dedicated to analyse the year in forensic details. But it’s time to look ahead. There are more reforms in the pipeline ready to be rolled out in the coming year. So, let’s do a bit of crystal-gazing and check out how 2018 can shape the future of our economy:
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A ‘We the People’ Budget
The previous budgets were primarily reformatory in nature. But the upcoming budget is likely to be a populist one, given that it will be the last budget before the general elections in 2019. This could be tricky as a populist budget can affect finances and financial parameters.
Excessive rural spending may not be productive for the economy, but the government may be forced to bow down to electoral realpolitik, especially after the grassroots rage in Gujarat. Therefore, the government will have to walk a tightrope while preparing the upcoming budget. They will have to be aware that public spending does not worsen fiscal deficit further. The government had earlier targeted to keep the spending pegged at 3.5% of the country’s gross domestic product (GDP), according to a few experts.
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Rate hike, not rate hack
The country’s economy may grow next year, but inflationary pressures are likely to remain. The main reasons for growing inflation can be attributed to rising crude oil prices, pay hikes and farm loan waivers.
These factors made the RBI pause interest rate at its recent policy meetings. Although a rate cut appears difficult now, the rate cycle may change from pause to hike in FY2019, according to a Kotak Securities report.
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Big bang banks
The banking sector can benefit this year. Until recently, the health of state-owned banks was in a funk due to unfettered rise in toxic loans, also known as non-performing assets (NPAs).Toxic loans had risen to a staggering Rs 7.34 lakh crore in September.
But the government’s decision to inject Rs 2.11 lakh crore into these banks was a timely shot in the arm for the ailing sector. The first batch of capital infusion will be issued in January. This is likely to serve as an antidote to a sector that had been hobbled in recent years. The economy is likely to get a lift as well. Reports in the media, citing several studies, suggest that the bank recapitalisation plan will play a major role in pushing the growth rate above 7%.
The proposed Financial Resolution and Deposit Insurance (FRDI) Bill can bring further reforms. Although the bill has been caught in a political maelstrom of late, the Bill plans to set up a Resolution Corporation, a body that will oversee financial firms and take corrective measures in case a firm is on the verge of flat lining. According to a report in The Hindu, the Resolution Corporation “will also be tasked with providing deposit insurance up to a certain limit yet to be specified, in the event of a bank failure”.
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Fuel-GST jam sessions
A Business Today report estimates that government tax accounts for nearly 50% of fuel price. But the taxes may be relaxed in the near future.
If the central government has its way, fuel may come under the purview of GST. This means that the tax will not exceed 28% -- the highest GST tax slab. In theory, this means that fuel prices are likely to climb down once it falls under the GST regime.
But that may not be the case. Fuel costs may go down, but only slightly. That’s because analysts reckon that the government may impose an additional cess, just like they have done with tobacco products. But do keep an eye out for any news concerning the Centre’s interaction with the GST council and state governments. Their dialogue will determine whether fuel is brought under the GST ambit. And also whether fuel costs will go down.
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7.2%
India’s growth may have stuttered in 2017, but the World Bank expects the GDP to rise by 7.2% next year. The economy is likely to pick up due to “recovery in private investments”.
