It’s economy, stupid

2017 has been a challenging year for the Indian economy. Growth in 2018 isn’t a given

The year 2017 was a difficult year for the Indian economy and from the looks of it, 2018 will not be an easy year either. There are several important State elections next year, many in States that the ruling Bharatiya Janata Party (BJP) will be defending. And if there are major lessons to be drawn from the Gujarat poll for the BJP, it is that agrarian crisis will be a major factor in the forthcoming elections because despite India’s increasing urbanisation, even on traditionally rural seats, agriculture still forms a major part of India’s economy and crucially, workforce and electorate. The Government’s plan to increase borrowing will derail any plans to reduce fiscal deficit. It will also likely lead to increased inflation and, therefore, the possibility of higher interest rates towards the end of 2018, neither things that bode well for the future.

The year 2017 was also the year that India felt the full force of the decision to demonetise high-value currency late last year. In fact, along with the landmark imposition of the Goods and Services Tax (GST), the decision to demonetise currency last year could be seen as major steps to formalise the large cash-based economy that India had become with tax evasion being the norm. While the merits and demerits of demonetisation and the way it was implemented can be debated ad nauseum, there can be few arguments about the necessity to have the GST. Many feel that it was made needlessly complicated with far too many rates with exemptions and exceptions, particularly for automobiles, which seem to have a strange tax structure of its own. While thanks to GST, things have become easier for some larger companies, things have become a lot harder for many smaller companies. Sure, there was a huge degree of tax evasion by the Indian industry that GST will likely address and with higher tax compliance, rates could even go down going forward, even for direct taxes, but it would have been naive to expect that the implementation of GST would not have led to complications and a slight slowdown in the economy. It is just that the implementation of GST immediately after demonetisation nearly created the perfect storm in the economy.

Thankfully, the Indian consuming class, the resilience of the global economy and low energy prices kept the ball rolling and India will likely still achieve 6.5 percent Gross Domestic Product growth in 2018. However, a worrying sign remains, that is the lack of jobs in the overall Indian economy, particularly higher paying jobs. India’s main consuming class still comprises a very small part of its overall population and wealth inequality and the need to create these jobs and increase India’s economic diversity is the biggest challenge facing the Narendra Modi and his Government in 2018. Without palpable economic progress, the voters might turn on the BJP and Narendra Modi in 2018 and further on. Narendra Modi paints himself as a man of development or ‘vikas’ and the opposition wishes to paint him as someone caring only about top industrialists. If the population at large does not share in the economic development of the country, they might start to believe the opposition.