Home >Politics >Policy >Why 2017 is a challenging year for the Indian economy

During the past couple of years, India has enjoyed the privilege of being among the most favoured investment destinations of the world.

Benign oil and commodity prices have helped improve Indian public finances and reduced some of its external vulnerabilities. Some of those tailwinds are turning into headwinds now, threatening the health of the Indian economy.

In addition, some of the old legacy issues relating to the excessive corporate leverage of the past boom have come back to haunt the financial system today. The pile up of bad debt has made both firms and lenders more cautious, delaying a recovery in capital expenditure. The lack of decisive actions to unclog the pipeline of stalled projects has added to the problem.

As if all these were not enough to cloud the outlook on the Indian economy, the shock of demonetisation has further weakened sentiment by lowering aggregate demand.

According to the latest IMF estimates, India is estimated to grow at 6.6% in 2016, a full percentage point lower than what was forecast earlier. If one believes, as several economists do, that the new GDP series overestimates growth figures (on which IMF bases its forecasts), then the real slowdown could be far sharper than what the official estimates and the IMF forecasts suggest.

The challenge of reviving the growth engines of the economy, without raising public borrowing too far and risking the wrath of credit agencies, is a daunting one


Not so long ago, the Indian economy had the dubious distinction of being among the Fragile Five economies of the world. Since then, it has made a spirited comeback. The recovery, which began during the fag end of the UPA regime and continued during the NDA period, was aided by a sharp decline in oil and commodity prices that allowed India to contain her twin deficits, and made India a relatively more attractive investment destination compared to commodity-exporting emerging markets. The inflows of foreign investments and a falling import bill has helped India raise its import cover ratio, even though this is still lower than that of its peers.


The big spoiler for the Indian economy in 2017 could be oil. A spike in oil prices to $70 a barrel is enough to raise India’s fiscal deficit by 0.4% of GDP and the current account deficit by 0.6% of GDP over the course of the coming fiscal year. A rise in oil and commodity prices will also complicate India’s fight against inflation, and shrink the space for rate cuts in the coming months. It will also make India appear less attractive compared to other commodity-based emerging markets, and may fuel larger foreign outflows than what the Indian equity markets have witnessed over the past few months.

Big worries

The bloated balance sheets of corporations and banks remain the biggest hurdles to a broad-based recovery. This is a legacy issue, and one that has been allowed to fester by successive governments and by the central bank. It is only in recent months that the skeletons in the closet have tumbled out leading to a sharp rise in non-performing assets. But despite the increased recognition of bad assets, and record asset sales by stressed corporate groups, the worst may not be over yet. The debt hangover will weigh on credit off-take and delay the revival of the capital expenditure cycle unless the government decides to surprise us by resolving the bad debt issue quickly, and unclogging the pipeline of stalled projects

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