CO N O MY

FiveKeChallengeforthe
Indianconomin2017
Decemer20,2016

RitehKumaringh
CorporateconomitandformerAitantDirectoroftheFinanceCommiionforIndia

AnIndianemploeelookforillegalIndianrupeecurrencnoteataankinMumai.
Photo:IndranilMukherjee/AFP/GettImage

2016haeenaneventfulearfromadvancemadeinclimate

negotiationtoquetioneingraiedoverthepropectofgloaltrade

andthegloaleconom.InIndia,thefulleffectofdemonetizationhave

noteteeneen.Giventheeandothergloalanddometicfactor,the
Indianeconomwillfaceafewchallengeinthecomingear.
HerearefivekechallengefortheIndianeconomin2017:
Vulneralerupee.Afterthedealonproductioncut,crudeoilpriceare

riingand,ifthatcontinue,itwillpuhupIndiatradedeficitdepending
onhowthecountrexportectorperform.Indiamerchandieexport
grewatahealth9.6percentinOctoer,utgiventheleakgloal

macroeconomicenvironment,growingprotectionim,uncertaintcreated
thereferendumintheUKandItal,andtheU..preidentialelection,
itdoutfulthatexportgrowthmomentumwillemaintained.IfIndia

exportgrowthinotutained,riingoilpricewilljeopardizeitcurrent
accountalance.

Capitalinflowintheformofforeignportfolioinvetment(FPI)orforeign
directinvetment(FDI)couldofferupportwhereexportgrowth

momentummadropoff.However,foreignintitutionalinvetorare

jitterwhilenetFDIinflowawellaremittanceareloingtrength.In
thelatmonth,FPIhavepulledoutover$5illionfromIndiadet

market.Aexpected,theU..FederalReerveraieditenchmarkinteret

rate25aipointandgaveclearhintatfutureratehike.Ontheother
hand,theReerveankofIndia(RI)hareduceditpolicratea

whopping175aipointinceJanuar2015,andthereipreureto

pruneitfurthereventhoughRIavoidedarecentratecut.TheU..Federal

ReerveactionwillreducetherelativeinteretrategapetweenIndiaand
theU..,andmainducecapitaloutflowfromIndiadetmarket,which
willputpreureontherupee.

Continuedlowcommoditprice
havehelpedtheIndian
governmentcontainitfical
deficitandreinininflation.
Moreover,thefallinguanwillmaketheRItolerantofafurtherlidein
therupeeaIndiawilllikelnotcompromiewithitexportprice

competitiveneandrikloingitgloalexporthare.Thingarenta
adathewerein2013,althoughdowniderikareincreaing.

Meanwhile,therupeewillremainweakandvolatilein2017.Going

forward,giventhatautantiallhighproportion(60percent)ofIndia

externalcommercialorrowing($182illion)areunhedged,aweakening
rupeewillcomplicatematterformancompanie.

Ficalhealthandmacroeconomictailit.Continuedlowcommodit
priceepeciallofcrudeoilhavehelpedtheIndiangovernment
containitficaldeficitandreinininflation.However,oilpriceare
hardeningagainaftertheuccefulconcluionofanOPCdealon

productioncutandthewillingneofnon-OPCmemertocooperate.
ThatinotgoodnewforIndiacurrentaccountalance.Itlikelto

puhupthegovernmentuidillandaidinflation.Thatma(evenif

partl)explainwhRIkepttheenchmarkinteretrateunchangedinit
latreviion.

Growingdivergenceetweenconumptionandinvetment.While

conumptionharemainedtead(growingat6-7percent)atleatuntil

demonetizationwaannouncedinearlNovemerinvetment,a

meauredgrofixedcapitalformation,haeeninnegativeterritor
forthelatthreequarter.Thiiduetocompaniedeleveragingtheir
alanceheet,operatingonalowercapacit(elow75percent)anda

demandlumpinothdometicandexportmarket.Itfell1.9percentin

thelatquarterofthe2015-16financialear,andthenfell3.1percentinthe
firtquarterand5.6percentintheecondquarterofthecurrentfinancial

earrepectivel.Thedeclineininvetmentiaprolem,particularlifoil
priceincreae,andgiventheincreaedgovernmentpendingforthe7th

PaCommiion,othofwhichwilllimitthegovernmentailittopend
oninfratructureandotherventure.

Demonetization.Aifalumpininvetmentwanotenough,

demonetizationinducedareductioninconumptiondemand.The

reultantdeclineinthealeofuineewillditurCapxplan,

epeciallintheMector,whichaccountfor45percentofIndia

manufacturingGDPand40percentofitmerchandieexport,andma
reduceanthingetween0.5to2percentofthecountrGDP.

Alo,accordingtotheRI,motofthedemonetizedcurrencnotewill

returntotheankingtem,onowindfallgainforthegovernmentfrom
detructionoflackmonetotheextentof20percentofthevalueof500
and100currencnoteincirculationainitialletimated.Nowthe
governmenticlaimingthatthemovewillencouragedigitizationof

financialtranaction.Itwill,utonamallercalethanithought,given
thelowacceandconcernonqualitofInternetinmallertownand
ruralarea.

Thenon-performingaetmenace.Depiteaerieofmeauretodeal
withadloanthegovernmentandtheRI,thenon-performingaet
oftateownedankincreaedtoINR63.03trillion($930illion)on30
eptemerfromINR55.03trillionon30June.Mananaltclaimthat

thingarenotoadforprivateectorank,utthehaveavoidedthe

rikcorporateloanneceartoupportindutrialexpanion.Thehigh
hareofankloangivenpulicectorankcouldaloeareultof
ankofferingloananctionedelectivelankemploeetofavor
croncapitalitratherthantakingcommercialconiderationinto

account.ThiiaprolemtheIndiangovernmenthanoteenaleto
tackleeffectivelet.

Indianankhavealoeenforcedtowriteoffadloan.Aareultofan

increaeinnon-performingaetandwrite-off,ankarenotaletopa
ontheenefitofpolicratecut(175aipointinceJanuar2015)to
orrower,epeciallthoeintheretailectorandM.Thiwillhave

implicationoncredit-financeddemandinectoruchaautomoileand

houingthathaveackwardandforwardlinkageforeveraluptreamand
downtreamindutrieuchateel,autocomponentandcement.

tillRoomforOptimim
Depitetheechallenge,Indiaiexpectedtoeamongthefatet-growing
largeeconomieintheworldin2017.Mitigatingtheerikiimportant,
particularlgivengloaleconomicuncertaint,andfailuretodooma
preventtheeconomfromrealizingitgrowthpotentialinthecoming
ear.

FDI Finance India

RitehKumaringh
CorporateconomitandformerAitantDirectoroftheFinanceCommiion
forIndia

RitehKumaringhiaMumai-aedcorporateeconomit
andformeraitantdirectoroftheFinanceCommiionof

India.HehaprevioulworkedforAditairlaGroup,13th
FinanceCommiion,MinitrofFinanceandCainet

ecretariatinvarioucapacitie.HewriteOpdcolumnon
economicandtradepoliciueforNikkeiAianReviewand
TheHinduuineline.

URL:http://www.rinknew.com/aia/five-ke-challenge-for-the-indian-econom-in-2017/