Fed hike, GST woes loom over economy

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Bikky Khosla | 15 Dec, 2015
Factory output growth for October surprised economic observers with its best showing since October 2010. Industrial production for the month rocketed to 8 percent, much higher than the expectation of around 7.5 percent. Manufacturing grew 10.6 percent and capital goods 16.1 percent, signaling recovery in the investment cycle, albeit slightly. It is true that a favourable base effect along with a festive season-led boom in purchases of consumer goods contributed to this spike, but still the IIP figures, which came on the heels of healthy July-September GDP data, give some relief. If reforms continue, it seems a recovery is not far off.

Reforms are not gaining much strength, however. The fate of the GST - touted as the most comprehensive indirect tax reform since the independence - is hanging in the balance due to continued protests by the opposition in the Rajya Sabha. Till recently, it was widely expected that the Bill could be passed this Winter Session, but now the National Herald row carries the threat of derailing the reform effort. The penultimate week of the winter session began Monday and it seems the GST Bill is fast running out of shelf life for this session. I think failure to pass the Bill this Winter Session will send a horribly wrong signal to the world on the country's ability to push reforms, during an already uncertain period.

A Fed rate hike may further add to these woes. The US central bank is expected to increase rates for the first time since 2006 when it will hold a two-day meeting that ends Wednesday, and such a move could potentially impact emerging economies like India, pulling back massive foreign funds. According to an estimate, during the December 7 - December 11 period, FPIs sold over Rs.3,495 crore in equity and debt markets. In addition, the rupee is likely to be hit and higher cost of borrowing on dollar loans may impact margins of the Indian industry. There is a silver lining however, as it is widely expected that the US Federal Reserve is unlikely to lay out an aggressive schedule of future hikes.

Meanwhile, the sealing of the Paris climate pact last week is a welcome development. In a historic move, nearly 200 countries clinched the deal aimed at keeping global warming "well below 2 degrees C". For decades, the rich nations sought to shift greater onus of battling carbon emission on the developing world, but now the developing countries are exempted from some obligations, taking into account their respective capacities in light of national circumstances. In addition, the developed countries have also agreed to raise more funds over time to help developing countries cut their emissions. The climate deal is only a first step on a difficult road ahead, but surely it is a step in the right direction.

I invite your opinions.