12
22 December 2017 / Outlook BUSINESSPerspective
G
reat uncertainties confronted
economic forecasters in 2017.
Early in the year, there were
endless debates on the pace of
remonetisation and the duration of economic dis-
ruption it caused. Then came the tumultuous tran-
sition to the Goods and Services Tax (GST), which
subsumes 40 % of India’s total taxes and, thus, sig-
nifi cantly impacts economic growth as well as fi scal
health. Separately, the unexpectedly rapid pace of
build-up in the new insolvency pipeline, and recapi-
talisation of public sector banks brought uncertain-
ty into the outlook for the banking sector. This, as
the economy continued to adjust to low food infl a-
tion which depressed farm income growth, and the
arrival of a real estate regulator, which slowed down
the new launches.
All this while, aided by the strongest global eco-
nomic recovery in seven years, continuing accommo-
dation by developed market central banks, and sever-
al sector-specifi c trends (the expectation of continuedmarket share losses by government-owned banks
to private sector banks, or reduced competition in
the telecom sector) the market showed remarkable
strength and stability. Strong infl ows into domestic
equity mutual funds supported these trends, though
a meaningful market impact, in our view, was only in
the stocks of smaller businesses.
CY 18 should see improving visibility, at least on the
economic front. Recent changes to GST should make
the transition smooth. As supply chains settle down,
they may also restart thinking about new invest-
ments. Central and state budgets presented in Feb-
ruary-March are likely to have explicit GST forecasts,
reducing confusion in the market: this year bond in-
vestors still do not know what is the target for GST
revenues! Going forward, as GST rates get further
recalibrated, the risk of inadvertent fi scal easing or
tightening is likely to be lower. If GST delivers more
revenues than the taxes it subsumed were expected
to, it acts as fi scal tightening, and vice versa.
As insolvency cases reach their time-bound resolu-
tion, the uncertainty on how much loss needs to be
booked, and by whom, will also be behind us. The
government will also be able to allot the announcedrecapitalisation amount to various banks, separating
the growth-capital part from the loss-compensation
part. While it might take several months more for
the new owners of these assets to put their resolu-
tion plans into action, visibility on new investments
is likely to improve. The infl ation outlook, clouded by
the recent surge in vegetable prices and the worry
about the impact of higher crude oil prices, is likely
to clear up, one way or the other.
That is not to say that 2018 would be totally devoid
of uncertainty. The upcoming general elections in
2019 are likely to keep the market overly sensitive to
political developments. There are several important
state elections during the year, and there has been
some debate in the media about the general elections
being brought forward as well. Separately, as global
growth momentum picks up, the stance of various
central banks, thus far relatively predictable, may
change. The direct impact on equities may not be
negative, but these changes may raise volatility if
bond yields rise, bond investors book losses, and someof the assumptions behind the once-again fl ourishing
structured products and deals are questioned.
The fi scal health of many countries could also get
aff ected by higher interest rates, though improving
growth should also be helping their tax revenues.
Lastly, with the political transition complete, as the
Chinese government restarts the adjustment of its
economic model in response to record high levels of
debt and over-reliance on investment, the economic
ripples may not be contained within the country.
Credit Suisse global strategists believe 2018 should
be a year of positive return for global equities, with
only gradual withdrawal of accommodation from
central banks (their action would be akin to taking
the foot off the accelerator as economic momentum
improves, and not about applying the brake). That
should be supportive for Indian equities too. Howev-
er, in a reversal of trends seen aft er FY 12 , the sec-
tors that are likely to outperform would be the ones
exposed to global trends. On the other hand, the
revival in the domestic economy built into current
estimates is likely to be pushed further out into the
future, driving underperformance of sectors exposed
to this growth. bWhile it might take several months more for the new owners of these
assets to put their resolution plans into action, visibility on new
investments is likely to improve