Key Domestic events that will drive markets in 2017…

While it is true that demonetization is officially over as of December 30th, the impact will be felt in the next few months. The IIP and PMI numbers for November and December will give a clear picture of the actual losses at the grass-root level. Intuitively, there seems to be a palpable impact on customer facing businesses like retail, automobiles and financial services. The financial impact of all this will be available at a macro level when the IIP and PMI numbers are announced. The micro impact will be visible once the quarterly numbers start coming out from mid-January onwards. The RBI has already downsized the GDP growth to 7.1% for the full year and it will be interesting to see how much gap with Chinese GDP growth remains after the impact of demonetization.

A very critical Union Budget…

The forthcoming Union Budget will be critical in more ways than one. Firstly, it will be the first Union Budget announced after the demonetization. The government will be looking to provide a healing touch for individuals at large to compensate for the pain of demonetization. Tax relief in the form of higher limits and wider exemptions is already being talked about. The Union Budget will also be critical as this will be the penultimate budget presented by the NDA government as the 2019 budget will most likely be a vote-on-account. Normally, previous governments have shown a tendency to move from reformist to populist from their penultimate budgets. It will be interesting to see how the forthcoming budget shapes up.

Key assembly elections could hold the key…

There are a number of very important elections that are coming up in the year 2017. There is the state of Uttar Pradesh and Punjab in the early part of the year and Gujarat in the later part of the year. After its performance in Delhi and Bihar, the current NDA government will be keen to ensure that it puts up a good performance in UP and Punjab. Any major reverses in these elections will be seen as a vote against demonetization and may put the brakes on the reformist initiatives of the government. In the previous budget, the government had rendered itself extremely well by giving a push to reforms without compromising on fiscal deficit targets. While the Union Budget 2017-18 will be announced before these elections, it will surely decide the tilt of the government in terms of reforms.

Shift towards digital is here to stay…

Indian telecom has gone through 3 distinct stages from a consumer point of view. The first stage was the rapid spread of mobile connectivity which happened from 2001 onwards. The second stage was the rise of social media and mobile internet through the rise of smart phones and cheaper access. Now the third stage could be just about M-commerce. The demonetization drive may have just provided the trigger for this trend. This will be beneficial in the long run since the cost of handling cash in the economy including printing and transporting works to 1.5% of GDP (according to MasterCard estimates). That works out to $35 billion. Even if a part of that can be saved by shifting to digital, the money can be put towards much better use. Year 2017 may be the year when we will see a distinct and perceptible shift to digital.

Implementation of the GST Bill…

This will be the biggest event for the Indian markets in 2017. While an April implementation looks quite challenging, the GST Bill is certain to be implemented effective from July or latest by October 2017. Implementation of GST will be critical for a variety of reasons. Firstly, it will bring the entire Indian market under one single umbrella. This will make shippers of goods indifferent whether they sell within the state or outside the state. This opens up a huge market for Indian businesses. Secondly, in terms of corporate level efficiency, GST will force companies to remodel their logistics infrastructure in line with competition. This will result in cost reductions due to realignment. Thirdly, in terms of GDP, the GST Bill will lead to GDP growth going up by 2% annualized, adding another $50 billion to annual income each year. The consumption effect of that will be huge. From a very short term perspective, one also needs to look at the impact of GST on inflation. Traditionally, GST tends to be inflationary for economies in the first 2 years. The NDA government will have to take that risk as it may go into the next elections with the risk of higher prices. Knowing the government’s willingness to take hard decisions, GST will not be a difficult call to make.

Year 2017 is likely to be crucial and interesting for the Indian economy and markets. The fervent hope is that India maintains its GDP growth advantage over China and that demonetization does not cause any lasting setback to growth. But the real action may, probably, lie in the realm of politics!