India's Economy Trumped Britain In 2016
Demonetisation also acted as a speed breaker in the planned take-off of the Goods and Services Tax, the biggest piece of reform since Independence, from April 1. States that saw their revenues being affected by demonetisation have stalled a consensus on supplementary legislations, and the April 1 schedule looks a tall order now.
But to give credit where it is due -- Prime Minister Narendra Modi and Finance Minister Jaitley -- there was never a moment that saw commitment to reforms slipping. After cleaning up the economic mess left by the previous UPA government, the Modi government has bitten the bullet and started carrying out tough structural and deeper reforms.
Despite this, private investments are still hard to come by in a big way and loans to corporate remained subdued throughout the year.
Gross Domestic Product (GDP) by some estimates, has slowed to 6.5 pct in the third quarter, from 7.3 pct in July-September.
The government is confident that these are only short-term blips, and in the long run, India is well poised to hop on to the higher growth trajectory.
While the economy grew by 7.2 pct in the first half of the current fiscal, the Reserve Bank of India (RBI) downgraded projections for 2016-17 to 7.1 pct, from the previous 7.6 pct. Fitch too lowered it to 6.9 pct from 7.4 pct while S&P had slashed its projections of 7.9 pct to 6.9 pct even before the November 8 demonetisation announcement.
While inflation was in check and trade and capital flows remained largely unaffected, exports - often seen as the engine for growth - have been tepid. Public investment has been robust, but private investment is yet to pick up. Industrial activity has been weakened by demonetisation, which has taken a toll on consumption demand, the mainstay of the economy.
From the biggest change in RBI's eight-decade history by adopting an inflation-targeting framework and moving to a collective interest-rate decision making to overhauling of the century-old bankruptcy law to concerted efforts to make India a 'one nation and one market' through GST, the transformation has been complete that laid the pitch for long-term structural benefits.
The new bankruptcy code will allow quick closure of businesses gone bad and prevent build-up of NPAs, which are already are at a 16-year high of 12 pct.
As the reforms momentum picked up, India overtook the UK economy in absolute terms in mid-December though it is still less than one-fifth of the UK in per capita terms. Though the glory was short-lived, it did highlight India's arrival on the global stage as an economic powerhouse that one can afford to ignore at its own peril.
More importantly, it has been able to shed any residual notion of colonial inferiority.
This is reflected in getting tax havens like Mauritius, Cyprus and now Singapore to redraw tax avoidance treaties with India, which is also negotiating a trade deal with the UK, post Brexit.
The way government handles the after-effect of demonetisation and the all-crucial Budget will now shape the narrative for the economy in 2017.
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