The year of change

Recovery of global economy, transparency in tax regime, return of equities and the bottoming out of interest rates

By Mohan Sule

Investors looking for stability in 2017 after a year of turbulence arising from second-guessing the US Federal Reserve’s moves, Brexit, negative interest rates in the EU and Japan, slowing of China’s overworked manufacturing engine, the stubborn refusal of Raghuram Rajan-led Reserve Bank of India to speed up cutting the cost of money to boost growth, the recurrence reports of mounting bad loans of PSU banks, slump in domestic exports including of tech services, the unexpected triumph of Donald Trump in US president polls and currency swap in India are likely to be disappointed. Many more disruptive forces are hovering on the sidelines. Not all of them will have an adverse effect. Some might even inject transparency, ease doing business and fuel private sector capital expenditure, notable for its absence in the year gone by. Advancing of the budget by a month is not the only change that will be seen in the New Year. The coming financial year might be curtailed to nine months so as to synchronize it with the calendar year. The budget for 2018 might be presented late this year, making the year unique. Anyway with the imminent implementation of GST, budget-making going ahead will be an academic exercise of presenting the balance sheet as the only area for tinkering will be direct taxes and import duty. Due to the tussle between states and the Centre over control of revenues, GST might become effective mid calendar year instead from 1 April. Prime Minister Narendra Modi’s 31 December 2016 announcement of sops for the rural and semi-urban areas is an excellent example of how the government need not wait for budget day to announce policy measures.

So the effects of two big-bang reforms, GST and shift to less-cash, will be the dominant themes this year. The widespread embracing of banking and digital channels will widen the tax base. A uniform and low indirect levy will protect the organized players from the unfair price advantage accrued to units without book-keeping and might prompt the small units to opt for the benefits of being in the formal sector. The third change will be the comeback of inflation. The RBI sounded a warning about food items looking up at its December policy meet and kept the base rate unchanged despite ample liquidity in the banking system from the inflow of cash following withdrawal of the high denomination notes on 8 November. The warming up of agri commodities is despite good southwest monsoon and higher sowing of rabi crop. Higher minimum support prices might be the contributor. On top of it is the threat of bounce-back in prices across the board on heating up of crude oil ever since the cartel of oil producers decided late last year to curtail production. With its usage to make inputs for industries across the board, the spurt in cost is sure to be passed on to consumers. Fall in unemployment and a robust job market in the US contributed to the Fed finally making up its mind on continuing ramp-up interest rates. A mighty dollar, however, has the power to keep the bubbling metals, riding on global recovery, capped.

Rejuvenation of exports will be the fourth transformation. With the US and Gulf economies staging a comeback, China will be the biggest beneficiary, as its comatose factories revive and its appetite for raw materials and intermediates surges. The flux in the banking sector will mark the fifth difference. The proliferation of choice, with payment banks and banks on tap vying for attention, might result in consolidation if the government decides to dilute control. Keeping off from interfering in appointments and operations is perhaps a step in this direction. As such banks will be at an inflection point of using the low-cost deposits collected since the last two months of last year to clean up their balance sheets and make themselves attractive to investors, depositors and borrowers. The sixth fallout will be the back-tracking to the Big-Is-Beautiful theme as companies with expanded capacities will be at the forefront of reaping the benefits of the spurt in consumption. A flurry of IPOs from small and mid caps eager to enter the big league might keep the secondary market under control. While the focus of action will be equities, bonds will bolt as interest rates bottom out. Volatility of traditional safe-haven investment instruments on fears of government crackdown on accumulation will be the seventh modification. Gold will be subjected to pulls from inflation and pressure of a resurgent rupee. Real estate will be the joker in the pack. Mid-segment and low-cost housing in tier 2 and 3 cities will be the growth drivers for listed developers as better road, air and digital connectivity will decelerate migration to big cities.