The lingering impact of demonetisation and implementation of the goods and services tax (GST) defined economic discourse in India in 2017.

A 30-notch jump up the World Bank’s Ease of Doing Business ranking to 100 among 190 countries and a much-awaited sovereign credit rating upgrade by Moody’s Investors Service confirmed the reform credentials of the Narendra Modi government like nothing else did.

Modi invalidated Rs1,000 and Rs500 banknotes in November 2016, pulling out 86% of currency in circulation by value, but it was in the early part of 2017 that the effect of the move on demand, prices and jobs was truly felt.

And coming eight months after the note ban, GST—touted as the biggest tax reform in India since independence—caused much disruption, with small and medium enterprises and exporters weighed down by the burden of complex filing procedures and delays in securing tax refunds.

The government is still struggling to streamline the GST processes.

The two consecutive disruptions brought down economic growth to a three-year low of 5.7% in the June quarter.

Growth accelerated to 6.3% in the September quarter, thanks to restocking by companies that had cut inventory in the run-up to GST.

The enactment of the Insolvency and Bankruptcy Code (IBC) entitled creditors to drag defaulters to the National Company Law Tribunal (NCLT) for time-bound resolution of bad debt.

With a host of loan default cases referred by the Reserve Bank of India (RBI) to commercial banks for start of bankruptcy proceedings, the efficacy of the system will be tested in the coming months.

If 2017 was the year of disruption, the government will be hoping that 2018 shapes up as a year of consolidation.

Most analysts expect economic growth to pick up in 2018, helped by a global recovery and a domestic manufacturing rebound.

RBI expects growth, measured by gross value added (GVA), to pick up to 7% in the December 2017 quarter and 7.8% in the March quarter.

Recent indicators of exports, core sector data and the manufacturing Purchasing Managers’ Index, indicate an economic recovery is underway.

At least two risks could derail the recovery.

First, rising crude oil prices. India was a major beneficiary of a sharp fall in oil prices starting in 2014 to $28 per barrel in 2016.

Price of Brent crude oil rose 18% in 2017 to $67.02 per barrel in December, a 30-month high. While higher fuel prices are likely to inflate input costs, exerting pressure on the margins of manufacturing companies, it will also widen the fiscal and current account deficits.

The immediate worry is its inflationary impact. Retail inflation surged to a 15-month high of 4.9% in November from 3.6% in October after remaining below 4% for 12 consecutive months.

Most economists believe RBI will keep its policy rates unchanged, but don’t rule out a rate hike if retail inflation remains above 5% for two consecutive quarters in 2018.

Secondly, the deteriorating fiscal situation. While rising crude oil prices will inflate the government’s subsidy bill, a drop in indirect tax collections after implementation of GST and lower non-tax revenue may make it almost impossible to achieve the fiscal deficit target of 3.2% of gross domestic product (GDP) for 2017-18.

The latest data showed that the government’s fiscal deficit reached 112% of the full-year target during April-November 2017.

On top of it, the government has been expanding its spending and decided to borrow Rs50,000 crore more through long-term bonds. Most analysts expect the next budget for 2018-19 to be presented on 1 February to be a populist budget, it being the last full budget of the Modi government ahead of the 2019 general election.

Rural distress has emerged as a common theme across the country, leading to many farmers’s protests and demands for farm loan waivers.

Finance minister Arun Jaitley has indicated that the focus of the next budget will be on the rural economy and infrastructure.

The government runs the risk of marring its record of fiscal prudence in four successive annual budgets if it opts for aggressive spending in its last year in office.

But the real challenge before the government will be to sustain the pace of structural reforms during the final leg of its term.

Public sector banking consolidation, privatization of Air India, more reforms in land and labour laws and agriculture are issues that cannot be postponed.

Administrative reforms, on which the government has delivered little despite its promise of “minimum government, maximum governance", need immediate attention.

How the government handles the risks and utilizes the opportunities that 2018 will bring may well define its future.

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