Macro Analysis

Trends of 2017


Image Credit: Chetan Singh

At the time of writing this, the stated objective of demonetisation has changed a few times (though not as often as the Reserve Bank’s notifications governing note exchange), from rooting out black money, to stamping out corruption, to drying up terrorist funding, to moving towards a cashless and transparent economy. The only thing that’s certain is this: The impact of this will be felt well into 2017, even as a host of other global and domestic factors affect India’s economy.

In a little more than a month, consumption has tanked, manufacturing slowed, and the farm sector has struggled. Meanwhile, banks while flush with funds, are bleeding because they have few avenues for lending. And foreign investors are voting with their feet fearing lower corporate earnings, devalued currency, and the next surgical strike from Prime Minister Narendra Modi. It has also put a serious question mark on the early implementation of the goods and service tax.

With oil prices hardening, inflationary pressures building up, and U.S. President-elect Donald Trump threatening to implement all sorts of protectionist policies, India Inc. has a bumpy ride ahead.

After demonetisation: The intention behind it is still unclear, but its effects are sure being felt.

For his announcement on Nov. 8, making high denomination currency notes illegal, critics have called Prime Minister Narendra Modi everything from Tughlaq to Indira Gandhi. The party line is that this is the bravest, most far-sighted move of all time. History will judge, of course, but meanwhile, what does this mean to us in 2017?

One, fewer jobs as companies cut production on falling demand. Consumer goods and vehicles seem hardest hit right now. A consumer goods biggie reported that sales by volume in November was -5.5% (the difference between actual and budgeted sales). Scooters saw a 2% dip in November, while motorcycles saw a steeper 10% fall. “More than cash not being available to pay for the vehicle, it is the uncertainty around cash flows that will make businesspeople go slow on their decision to buy,” says Kumar Kandaswami, partner at Deloitte Touche Tohmatsu India. The silver lining: Tom von Bonsdorff, managing director, Volvo Auto India, says sales of luxury cars will not be hit.

Two, food inflation, as farm productivity could fall. There were fears that the rabi crop would be hit as farmers couldn’t buy seeds. That problem was resolved, and rabi sowing has reached near normal levels. However, sales of urea have fallen almost 20%, which is likely to hit productivity. Lower-than-average wheat production could lead to trouble, as wheat stocks with the government are at the lowest levels since 2007. Food inflation could be just around the corner.


Trade treaties: Revising trade agreements with known tax havens could see a gradual drying up of foreign investment.

There’s a traditional Chinese blessing, or curse, that goes: “May you live in interesting times.” Vikas Sharma, president and CEO of Nomura Financial Advisory in India, is clear that he thinks it’s a curse. Too many “interesting” events have derailed the markets, and the effects are likely to last well into 2017. Macro policies, as well as international events such as Brexit and the U.S. elections, caused global markets to shudder.

India is likely to see less foreign money coming in as foreign portfolio investors worry about a dip in GDP growth on account of demonetisation, and higher current account and fiscal deficits because of higher oil prices.

A weaker currency—Nomura sees the rupee touching 70.2 a dollar—and  outflows by foreign institutional investors will also hurt.

Implementing the amended double taxation avoidance agreements (DTAAs) already signed with Mauritius and Cyprus, and later with Singapore, could also have adverse effects. Foreign direct and institutional investors have long used Mauritius and Singapore to funnel funds into India. Sample this: Of the $383 (Rs 24.1 lakh crore) billion held by foreign portfolio investors in September 2016, Mauritius accounted for
19% and Singapore 11%.

It’s the same when it comes to FDI.


The great wait: The goods and services tax has long been in the pipeline. All indications are that 2017 will finally see it implemented.

While detractors have accused the government of being unnecessarily secretive over the ban on high-denomination notes, nobody can level that charge against the GST or the long-promised, much-discussed goods and services tax. If anything, there’s been way too much discussion on GST. Till 2016, when the government, with much fanfare, announced the passage of the GST Constitutional Amendment Bill to pave the way for the actual GST Bill in 2017. Except, it now appears
that it may not be passed, with many states demanding that the bill be deferred to allow them to tide over the impact of demonetisation.

Doesn’t seem like an unfair demand. Except for this: If the bill is not passed by Sept. 1, 2017, it will lapse and a new ordinance will have to be passed. Worse, neither state governments nor companies will be able to gear up to take critical decisions on budgets, pricing, and demand forecasting. This is why, when such tax laws are passed in most other countries, companies are given a year to 18 months to get systems in place; India is giving its companies three months or so to transition.

The land of the free: The U.S. is still the land of opportunity for a large section of Indians. But will the new administration welcome them?

If he could, the President-elect of the U.S., Donald Trump, would probably build a “beautiful” wall to keep much of the developing world out of his country. Indians, who watched Trump’s riotous romp into power with mixed feelings, continue to vacillate. Yes, Trump has threatened to “end forever the use of the H-1B as a cheap labour programme”. But he has also vowed to remove “the barriers to entry into free markets for drug providers that offer safe, reliable, and cheaper products”, which is excellent news for Indian generics makers who have been trying with limited success to enter the U.S.


While the Indian information technology industry is keeping a close eye on the visa issue, there’s something else their finance officers are waiting for. Trump’s grand plans to revive the economy could lead to higher inflation rates and interest rate hikes by the U.S. Federal Reserve, which will lead to the strengthening of the dollar. And that is good news to the IT industry here, which earns nearly 60% of average revenue from the U.S. Meanwhile, Indian importers will struggle, as will the capital market, since foreign borrowing will become more expensive.

Then, there’s Trump’s promise to hike tariffs on non-energy imports from Mexico and China; that could open a window of opportunity to Indian firms. On the whole, however shocking it may seem, it looks like a Trump administration could be good for Indian business.

Corporate governance: The Tata imbroglio has brought to centre stage issues of corporate governance and the rights of shareholders.

When Cyrus Mistry was replaced by Ratan Tata as chairman of the board of Tata Sons in a seemingly sudden move, it brought to the fore (again) issues of corporate governance, the rights of shareholders, the role and power of boards, and the duties of independent directors. “What the Tata fiasco has shown is that dominant shareholder can hold a company to ransom,” says Kaushik Dutta, founding co-director of New Delhi-based Thought Arbitrage Research Institute, which advises companies on corporate governance.


While it’s unlikely that there will be anything done in the Tata Sons case, given that it’s a privately held body, other companies will not find it easy to ride roughshod over similar issues. So, the role of independent directors will come under close scrutiny of the market regulator, Securities and Exchange Board of India.

“Focussing on the role, power and responsibilities of  trusts will increasingly become important in the coming year,” says Amit Tandon, founder and managing director of Institutional Investor Advisory Services.

Most important, shareholders will no longer be satisfied with the reputation of any organisation, but ask tough questions about the structure of the organisation, its functioning, financial details, etc. 

(Additional inputs by Debabrata Das)