A volatile year

A volatile year

As far as the economy is concerned, 2016 could be characterized as a year with two halves. It started with things looking up for India. The global situation, on balance, was benign. The foreign policy energy displayed by the Narendra Modi government was beginning to bear fruit and India was the bright spot in a world searching for growth. To its credit, the government was looking ahead and trying to reconfigure India’s economic architecture through new institutional mechanisms, such as the one to tackle monetary policy. However, over the second half things unraveled both at home and abroad.

Indian economy is tightly integrated with the world through trade and capital flows. With Brexit in the UK, protectionist signals from Donald Trump who won presidential elections in the US and now with the Opec cartel working to cut production and push up oil price, India’s external economic environment has worsened. So far, India has experienced its best years when trade and capital flows were relatively unhindered. The bad news is, that may be about to come to an end now.

Inflation is under control at the moment, but RBI’s new monetary policy committee has signaled its anxiety about the future. Exports, an engine of growth, have been tepid for the most part – threatening ‘Make in India’. And the collapse of investment demand globally coupled with India’s banking problems means that private investment has never been this weak in a long time. Industrial activity in the second half of the year was weaker than anticipated. These challenges were compounded by the demonetization exercise in November. Demonetization has taken a toll on consumption demand, which has been the economy’s mainstay.

The way ahead must be to first deal with the immediate disruption caused by demonetization. RBI and finance ministry must Remonetize quickly. Subsequently finance minister Arun Jaitley must deliver on his fourth budget, which will be a make-or-break one not just for the country but also for NDA. It needs to be a feel-good budget, which can be supplemented by the rollout of goods and services tax (GST) – the big reform the Modi government has pushed forward. The best antidote to uncertainty and a sputtering economy is reform. Prime Minister Narendra Modi must use his considerable political capital to initiate significant changes in the way India’s economy functions.