The first phase of the Gujarat elections concluded on 09th December in South Gujarat and Saurashtra with the rest of Gujarat going to polls on 14th December. The final outcome of the polls is expected on 18th December with the Congress expected to put a tough fight against the BJP this time around. The Gujarat polls is critical for 3 reasons. Firstly, the BJP has been in power in Gujarat for 22 years in a row. Secondly, Gujarat will be seen as a mini-referendum ahead of the central elections in 2019. Lastly, it is expected that any reverses for BJP in Gujarat may push the BJP towards a more populist economic mode.
According to the former RBI governor, Dr. Y V Reddy, the full impact of the demonetization and GST will continue to be felt in the next 2 years. According to Reddy, the liquidity crunch caused by demonetization is likely to hit the MSMEs and the rural and semi-urban sectors quite hard. This has created a major problem of employment and hence the spill over effect is likely to be felt for some more time. The impact is already visible in the services PMI. GST, on the other hand, is likely to hit the exports and MSME sector hardest and the inflation pressures could also continue for some more time.
According to the CII, the Business Confidence has seen an uptick in the October to December quarter. From a level of 58.3 in the previous quarter, the Business Confidence level is up to 59.7. That clearly indicates that the business firms are seeing a genuine turnaround in sales and investments in the third quarter. Since this index is based on a survey of large, medium and small enterprises, this is likely to be more representative of the general trend in the markets. The government also badly requires an economic boost after the growth numbers have really lagged for 5 consecutive quarters.
Even as FPI flows into India have faltered ahead of the US Fed meet in December, Indian mutual funds appear to having a field day in terms of collections. The month of November 2017 alone saw mutual fund inflows to the tune of Rs.126,000 crore taking the total AUM of the Indian mutual fund industry to Rs.21,80.000 crore. Most of these inflows have come in the form of equity funds, ELSS and liquid funds. Even balanced funds saw sharp inflows but gold ETFs continued to see outflows. The MF investments in equities has kept the markets buoyant despite FPIs in selling mode.
According to a recent report brought out by Nishith Desai and IAMAI, the Indian digital services industry had the potential to touch $1 trillion by 2022 with the right policy framework and the right growth environment. According to the report, one of the key considerations is the tax structure in India and this specifically important because most of the investments in digital call for technology transfer along with capital transfers. That is only possible with the help of a very conducive legal framework. According to the report, the potential is huge and there is a mountain of capital that is waiting on the side-lines. But for them to commit capital into India it is essential that the tax structure must be at par with other countries. This is more so in the light of cases like Cairn and Vodafone where taxation is the key issue.
The Chandrababu Naidu government may be finding itself in a spot with respect to use of funds under the Externally Aided Projects (EAP). The EAP of Rs.20,000 crore was offered to Andhra in lieu of the Special Status which had to be utilized within 2 years. However, the AP government has asked for a longer time period and more flexibility in the usage of funds. The AP government also wanted these funds out the ambit of FRBM, which the central government has rejected. As a result, projects worth nearly Rs.40,000 crore is stuck in limbo in the newly created state of Andhra Pradesh.
