- India’s exports appear to be recovering, based on an uptick in global economic activity- expected to continue in the aftermath of the US elections and expectations of a fiscal stimulus. The IMF’s January update is projecting an increase in global growth from 3.1 percent in 2016 to 3.4 percent in 2017.
- The outlook for private consumption is less clear. International oil prices are expected to be about 10-15 percent higher in 2017 compared to 2016, which would create a drag of about 0.5 percentage points.
- Consumption is expected to receive a boost from two sources: catch-up after the demonetization-induced reduction and cheaper borrowing costs, which are likely to be lower in 2017 than 2016 by as much as 75 to 100 basis points.
- Too early to predict monsoon prospects in 2017 and hence agricultural production. But the higher is agricultural growth this year, the less likely that there would be an extra boost to GDP growth next year.
- Since no clear progress is yet visible in tackling the twin balance sheet problem, private investment is unlikely to recover significantly from the levels of FY2017.
- Real GDP growth to be in the 6¾ to 7½ percent range in FY2018. Even under this forecast, India would remain the fastest growing major economy in the world.
- There are three main downside risks to the forecast-
- a) The extent to which the effects of demonetization could linger into next year.
- b) Geopolitics could take oil prices up further than forecast.
- c) Risks from the possible eruption of trade tensions amongst the major countries ,triggered by geo-politics or currency movements- could reduce global growth and trigger capital flight from emerging markets.
Will be marked by three factors-
- The increase in the tax to GDP ratio of about 0.5 percentage points in each of the last two years, owing to the oil windfall will disappear.
- Fiscal windfall both from the high denomination notes that are not returned to the RBI and from higher tax collections as a result of increased disclosure under the Pradhan Mantra Garib Kalyan Yojana (PMGKY).
- GST implementation.
- In addition, muted non-tax revenues and allowances granted under the 7th Pay Commission could add to pressures on the deficit.
CLIMATE CHANGE AND INDIA
- The Paris Agreement on climate change in December 2015 has been one of the shining recent examples of successful international cooperation.
- India has increased its excise duties on fuel. The increase in petrol tax has been over 150 percent in India.
- In contrast, the governments of most advanced countries have simply passed on the benefits to consumers, setting back the cause of curbing climate change. As a result, India now outperforms all the countries except those in Europe in terms of tax on petroleum and diesel.
EXCHANGE RATE POLICY
- In the aftermath of the Global Financial Crisis, the euro zone crisis, and the China scare of 2015, international trading opportunities are becoming scarcer.
- The world export GDP ratio has declined since 2011, and going forward a sharp rise in the dollar is expected with a corresponding decline in the currencies of India’s competitors, notably China and Vietnam.
- Given India’s need for exports to sustain a healthy growth rate, it is important to track India’s competitiveness.
- The policy implication is that if India is concerned about competitiveness and the rise of exporters in Asia, it should monitor an exchange rate index that gives more weight to the currencies of these countries.