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2017 was year of economic transition, adjustment and moderate recovery

The short economic story of this year is that it started with the long shadow of demonetization – announced in November 2016 – cast over it, experts said

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Famous author of bestsellers, including India Grows at Night, Gurcharan Das, believes demonetization and the faulty structure of the newly-launched goods and services tax (GST) put India's economic growth clock back by a year in 2017.

He called it a "lost year" when it came to economic growth.

"I think that both demonetization and GST will have long term benefits. But, in the short term, they have caused pain. Now, GST is already on the way to recovery and demonetization is behind us. The pain has gone but, yes, we have lost a year," he told DNA Money.

Another authoritative voice on economy, Aditi Nayar, principal economist of Icra, also called 2017 as a year of "transition, adjustments and moderate recovery".

"It's (2017) been a period of transition and adjustments, and a moderate recovery has set in now. We are headed for an improved growth in FY19," she said.

The short economic story of this year, which will end in a few days, is that it started with the long shadow of demonetization – announced in November 2016 – cast over it. The adverse impacts of note-ban smothered India's potential growth as cash was sucked out of the economy and trade in the informal sector, which constitutes over 90% of India's economy, suffered in a big way.

This quickened the pace of decline in the gross domestic product (GDP) growth rate, which slipped from 7% in the October-December quarter to 6.1% in January-March quarter. It further dropped to 5.7% in the June quarter as concerns over GST rollout compelled companies to de-stock goods. GDP growth recovered to 6.3% in the September quarter as effects of note-ban and GST waned. Economists from the leading consultancy firms, the government and the Reserve Bank of India (RBI) have given GDP growth rate forecast for the current fiscal – April 2017-March 2018 – ranging between 6.7% and 7.1%.

Not only does this growth rate look tough to achieve at the moment, but it is way below India's growth potential of 8%, which was at a kissing distance before demonetization. Das, whose book India Grows at Night talks about the success of private sector despite inefficient governance, says India would have to look at 8% growth to create jobs and spur demand for accelerating economic growth.

"We had reached 7.9% (right before demonetization) and I had made the prediction that now we are approaching 8%, meaning that jobs were coming back," he told DNA Money.

According to him, 1% of GDP growth leads to 1.5 million new jobs. And each new job creates indirect jobs, which leads to another 6 million jobs that supports five people; "so three crore people benefit from 1% rise in GDP growth rate".

He believes the government needs to single-minded focus on employment generation to push growth. This year's economic growth was mostly sans job growth, which can be taken as one of the reasons for low demand and meagre private investment.

Das feels aggressive push for growth in the construction sector, exports and tourism would help government generate employment. Sadly, exports and tourism have broadly languished this year.

A slight pick-up in exports in recent months has mostly been due to rise in commodity prices rather than demand-led or increased competitiveness of Indian exports.

Cumulative value of Indian exports from April to November this year was $196.48 billion as against $175.41 billion during the same period last year, a growth of 12.01%.

"Exports are picking up because of higher commodity prices," said Nayar.

Das said India needed to expand its share in the $16-trillion global exports from the current 1.7% to 2.2% to reach the 8%-10% growth potential.

On the inflation front, 2017 saw consumer price index (CPI) inflation fall to this year's lowest level of 1.54% in June and then inch up to 4.88% in November. This has dashed all hopes of any further cut in repo rate by the central bank. Economists expect it to remain elevated through 2018 with trends in commodity prices showing that they will continue to be firm next year.

Finally, after staying on course for fiscal consolidation and adhering to the fiscal deficit target for the last three years, it looks like the Prime Minister Narendra Modi-led government may for the first time not meet its fiscal deficit target of 3.2% of the GDP for the current fiscal.

The government's finances have gone awry with GST collections falling every month since it was rolled in July. GST revenue has dipped 15% to around Rs 80,000 crore for November from over Rs 95,000 crore in July.

On Wednesday, the government revealed that it would be expanding its market borrowings by Rs 50,000 crore in the current fiscal, signalling that it may breach its fiscal deficit target.

"Though higher disinvestment accruals and dividend receipts from public sector units may act as mitigating factors this year, fiscal deficit may still go up by 30 basis points to 3.5% as a result of the Rs50,000 crore additional borrowing," said Madan Sabnavis, chief economist at Care Ratings.

And as curtains ring down on 2017, the Indian economy is taking a turn to revive economic growth. One has to now see whether it will be able to make up for the lost economic year in 2018.

GROWTH SPRINGBOARD

  • The short economic story of this year is that it started with the long shadow of demonetization – announced in November 2016 – cast over it, experts said
     
  • The adverse impacts of note-ban smothered India's potential growth as cash was sucked out of the economy and trade in informal sector suffered in a big way
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