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2016-17 in review: note ban, debt woes, inflation

LiveMint logoLiveMint 28-03-2017 Asit Ranjan Mishra

The year ending 31 March has proved to be a watershed year for the Indian economy with major economic reforms such as the bankruptcy law and the goods and services tax (GST) getting the go-ahead. However, what would define the year is the shock withdrawal of 86% of India’s currency from circulation by the government on 8 November, the impact of which is yet to be fully comprehended. The year will also be remembered for retail inflation hitting a record high and exports showing clear signs of recovery.

Inflation inching up

Retail inflation quickened for the first time in six months in February as food inflation reversed its downward trend, confirming the central bank’s apprehension. The Reserve Bank of India surprised the markets by shifting its monetary policy stance from accommodative to neutral in its January policy review. Wholesale inflation after remaining subdued for most part of the year rose at a faster pace than retail inflation in January because of rising commodity prices.

Impact of demonetisation still inconclusive

While weak factory output data continued to indicate poor capacity utilization and tepid consumption demand, gross domestic product (GDP) data showed robust industrial growth. GDP growth in the December quarter also surprised analysts as it shrugged off the impact of demonetisation. Most analysts say the 2016-17 GDP numbers will be revised downward as more data, especially from the informal sector, comes in. They expect only a mild economic recovery in 2017-18.

Stressed banks, corporate sector drag down investments

One of the key reasons for the dearth of investments is what has been termed as the twin balance sheet problem: Debt-laden companies and banks saddled with bad loans lack the capacity to invest in new projects. Finance minister Arun Jaitley has indicated that the government is working with the central bank on a radical overhaul to resolve the issue of bad loans.

Signs of recovery in exports

However, amid the gloom, the external front of the economy has turned positive, with merchandise exports showing consistent signs of recovery starting from September, owing to a gradual improvement in the global economy. While the current account deficit widened to 1.4% of GDP in the December quarter from 0.6% in the preceding three months, it still remains within the government’s comfort level.

Graphics by Ahmed Raza Khan/Mint.

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