2016: THE YEAR THAT WAS
Abhijit Mukhopadhyay is an economist. He can be contacted at abhijitmukhopadhyay[at]gmail.com.
The year 2016 started with the broader slowdown persisting in the world economy. That resulted into other repercussion but more importantly growth of world trade decreased. This hindered the process of growth in many countries including India and China. Many countries which were pursuing export-oriented growth models also faced the consequences of this overall slowdown.
The key point here is that export no longer provided the avenue by which an economy could attain a sustainable economic growth path. In India also this slowdown in export created its own adverse effects. However, according to the official data Indian economy continued to grow at more than 7 per cent rate. There have been debates and scepticism expressed about the methodology of estimating GDP in the new series. Quite a few economists stated that the growth, as claimed in the new official data series, is not visible anywhere in the economy or in any other indicators. Indicators expressing the growth in industry or in household or commercial purchases also do not support incidence of such high growth, according to these economists.
Simultaneously, employment generation data show a downward trend, particularly in those sectors which are dependent on exports. If at all this economic growth is happening then this growth can be dubbed as a “jobless” or “jobloss” growth. Otherwise, employment would have increased substantially in some or other sector.
Throughout the year, there was also a buzz around that the US Federal Reserve will increase the rate of interest in the US. This also has its own effect in Indian context. An increase in American rate of interest will invariably attract some of the global finance capital, which are parked in the financial markets of emerging markets like India, out of the country and back to the American shore. After the win of Donald Trump in recent presidential election, the US Federal Reserve Bank indeed increased the rate of interest, and as expected it resulted into some foreign institutional investors’ (FII) money going out of Indian financial market.
As a result of that, rupee has also weakened compared to the US dollar. This could’ve been a good thing for the Indian exporters, but overall slowdown in trade is restricting Indian exporters to reap major benefits out of this rupee fall. On the other hand, rupee fall can have adverse impact on the balance of payments as the imports are getting costlier. Coupled with the foreign capital outflow, this can pose some serious future challenges.
While projects like “Make in India” had been started with the good intention of making India a manufacturing hub, these endeavours are not creating desired effects because there is a shortage of all kinds of infrastructure like road, port, power, and telecom. Overall slowdown also made the task difficult.
In the reform front, one positive step which has been taken is the goods and services tax (GST) reform. This has the potential to substantially increase the ease of doing business, and also has the potential to widen the indirect tax net all over the country. However, critics have pointed out that solely concentrating on indirect tax front has its own pitfalls. This is because indirect taxes, by definition, affect each and every individual in the economy. For example, an increase in the sales tax for any essential item affects everybody irrespective of people’s income level, the rich and the poor pay the same tax. So, to make the tax structure more equitable it is imperative to make suitable changes in the direct tax structures like income and corporate tax.
However, all economic measures and happenings were eclipsed by the end of the year as the government announced demonetisation measure in the month of November. The move to replace the currency notes in the denomination of 500 and 1000 has hit the economy hard enough since the announcement of the measure.
This was done to address the counterfeit currencies and ostensibly to weed out black money of the economy. The idea was that the black money held in cash will not return to the system and that way even some fiscal benefit will accrue to the government. But the number of counterfeits seem to be very less in number if the official data are to be believed – 28 in 1 lakh number of currency notes. And by the middle of the December it has become quite clear that most of this money are back into the system. One may argue that now the government can track down the offenders and take out black money. But, if raids were to be done to take out black money then this could’ve been done without banning the currency notes. Universally, high-end consumptions are tracked to achieve that, and India could’ve also done the same.
A new narrative of cashless economy has emerged also by the end of the year. Once again, without widespread and required financial infrastructure – achieving the goal of a cashless economy will also be extremely difficult. In India, the penetration of banking facilities is yet to be adequate and infrastructure like electronic payments facilities are also not at the desired level. And of course, promoting a cashless system could’ve also been done without banning currency notes.
As money are sucked out of the system, and cash payments got hit – the economy, particularly the informal and the rural part of it, is expected to be adversely affected. The reduction in consumption expenditure has also apparently crept in some segments. All these can have some short term negative impacts on the economy.
If Indian economy has to bounce back in 2017, then banned currency notes need to be replaced as soon as possible. Reforms like GST need to be implemented quickly, and more need to be done to revive the infrastructure and manufacturing sector to generate domestic demand. Simultaneously, there have to be more social welfare expenditures to make the growth more equitable. Only then we can hope for a substantially better 2017 as far as the economy is concerned.