Six factors impacting India’s economic performance in 2017

The past few months have been uncharacteristically eventful for the Indian economy, and we expect 2017 to be an interesting year as well. Even though Trump mania has taken over the world, the Indian government remains busy dealing with their own domestic issues (no surprises there).

While the announcement of India’s FY 2017-18 budget on 1 February will give us more clarity on the specific policy measures that will impact growth, FSG has identified six factors that will be critical in determining the outlook for the Indian economy going forward.

  1. Currency demonetization and recovery from the cash crunch: The impact of Modi’s demonetization initiative on the Indian economy is still ambiguous. Overall growth is expected to decline in the current fiscal year (ending March 2017) because of lower private consumption and investment. While we expect economic activity to gradually pick up as the cash crunch subsides through the course of the year, the exact pace of recovery is difficult to determine (clients can access FSG’s India Market Review – Q4 2016)
  1. The implementation of the Goods and Services Tax (GST): The Indian Minister of Finance recently announced that the GST will be implemented starting 1 July, 2017, giving companies a realistic date to work towards. Even though we anticipate early stage implementation issues, the GST is positive for the Indian economy as it will gradually improve private investment over the medium term (read FSG’s report on India’s Goods and Services Tax)
  1. State elections: A number of states will hold elections in the first quarter of 2017: Punjab, Uttarakhand, and, perhaps the most important, Uttar Pradesh (UP). Even though regional parties control the government in UP, the performance of the BJP will be closely watched, especially after the currency demonetization measure. Historically, the performance of the two national parties – the BJP and the Congress – in UP is closely linked to their performance in the next general election. The UP election is also important in determining which party will control the upper house of parliament going forward. Having a majority in both houses of parliament is crucial for any government to implement important structural reform in India
  1. Trump’s trade policies: Unlike many Asian economies, India is not particularly dependent on exports to drive economic growth. Even so, Trump’s protectionist policies will have an impact on the Indian economy, particularly the country’s large service sector. The US remains the largest export destination for India’s services, and uncertainty over Trump’s trade and immigration policies has weakened the outlook for the sector
  1. The performance of the rupee: The expectation of higher interest rates in the US, a strengthening dollar, and diverging monetary policy in India will continue to put downward pressure on the rupee this year. However, it will remain one of the better performers in emerging Asia given the country’s relatively higher forex reserves and improving twin deficits
  1. Oil price shocks: Growth in India, an oil importing country, would be negatively impacted by an oil supply disruption, which could lead to higher oil prices. Public spending, currently bolstered by low oil prices, would need to be curtailed and inflationary pressures would increase, dampening consumer sentiment

Overall, India’s economic growth – with numbers consistently above 7% from FY 2017-18 – remains robust and the envy of many other emerging economies. As executives re-evaluate the role of India in their emerging markets’ portfolios and look to the country as their main growth driver going forward, they should evaluate the impact of the six factors above on their India operations in 2017 in order to develop a thorough strategic plan.

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