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India – Economic Health 2018

India’s annual economic report card, released on 29th of January 2018 has given a lot to celebrate but has also provided enough reasons for caution. The roughly 500 page document has suggested that private investments and exports would continue to be the surefire ways of sustaining growth. It has called for focus on creating jobs, revamping education and raising farm productivity, identifying these as the key challenges in the medium term.

The economic survey has confirmed that the Economy is on a rebound and should touch 7.5 % growth rate in 2018 and 2019 making it the fastest growing major economy. It has achieved a high of 8 % in 2015 but had seen an unnatural dip in 2017 to 6.8 % which was a four year low. The reasons for the slow down in 2017 was due to the demonization of currency as well as the introduction of the Goods and Services Tax regime.

The  economy did slow down in six months following demonitisation, but the positive side effects was the inclusion of an additional 1.8 million tax payers and rising thus increasing overall tax collections.

The implementation of the GST in 2017 helped “discover” around fifty million formal jobs and increased  financial inclusion three folds between 2014 and 2017 and rising.

The Indian stock index SENSEX and NIFTY have gained new peaks and going through an extended bull run. This of course requires caution for investors as well as greater vigilance, as at the peak of the last bull run in 2008, the correction was as steep as 68 % over an 18 months period. There is hence a possibility of a sharp correction in stock prices.

The economic survey has provided multiple reasons for caution. There is a large concern towards high global oil prices, which could further inflame inflation. The Reserve Bank of India also does not have a very large window for further interest rate cuts.

The reform agenda hence for the next couple of years would be to focus on stabilizing GST, addressing the problem of bad loans, privatization of government owned businesses, e.g the Air India, shrinking unviable banks and allowing a greater private sector participation, besides improving the education sector and creating jobs through infrastructure stimulation.

In a very charged atmosphere and in the shadow of a looming election year, the Union budget of 2018 would make very interesting reading, where the government will need to cover all bases for growth and somehow reduce inflation and increase jobs.