The New Year party this Saturday will be somewhat subdued, thanks to several unexpected developments during the year. At the global level, the impact of backlash against globalisation, and in India the disruptions due to demonetisation, are playing out. Whether these will lead to populist policies that do not make economic sense is an anxiety that has dented the positive vibes generally characterising the year-end celebrations.
Donald Trump has promised to put the United States’ interests upfront. He has threatened to walk out of international trade agreements, raise protectionist tariffs and cut corporate tax rates to entice businesses to invest and create jobs in his country. Britain’s decision to leave the European Union and somewhat inimical responses to the migration of refugees in parts of Europe has raised apprehensions of instability and weaker growth in that region.
China continues in its low growth path, even as it tries to boost domestic consumption and move away from an export-led growth strategy. The emerging economies, dependent on export of commodities, are struggling to maintain their growth rates. They face the prospect of investments fleeing to the US in search of better returns. The cartel of major oil producing countries has decided to cut production, to get higher revenues from their export. In India, the government was on course to make it easier to do business, attract foreign investment, upgrade infrastructure and increase spending in the social and rural sectors. After two years of drought, the monsoon was good and the prospect of record growth in agriculture had brightened. However, the momentum of growth and reforms have stalled after the demonetisation of high denomination currency notes. It might take two or three quarters for the economy to regain normalcy.
A topic less discussed is of higher spending on defence to cope with heightened threat perceptions and the higher administrative expenses that might wipe out the gains from relatively low oil prices. The fear is that the government might prefer populism, despite professions to the contrary, to win or retain the favour of voters adversely affected by demonetisation.
Export and import remained sluggish through the first eight months of the year and then started picking up, due to a spurt in global demand and higher commodity prices. Here again, demonetisation has broken the revival trend but hopes are that the growth in trade will increase soon enough, due to depreciation of the rupee.
The year’s high point was amendment of the Constitution to enable introduction of a goods and services tax. However, disruptions due to demonetisation have dampened the enthusiasm of some states on bringing in this tax reform by April 1, 2017. The commerce ministry raised the entitlements under the Merchandise Exports from India Scheme and made it easier to claim the incentives by abolishing the requirement of landing certificates. The finance ministry reformed the dispensations for customs-bonded warehouses and brought in a ‘single window’ for submission of all documents necessary for import and export. Both ministries took many steps to remove difficulties and make small but useful changes in the rules, to help the trade. However, all those measures pale into insignificance against the sledgehammer of demonetisation.Overall, a year of dramatic and unpleasant surprises is coming to a close.
E-mail: tncrajagopalan@gmail.com
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