Economic Outlook 2017: India

India will be hoping for stability in 2017 after it was put through the wringer last year, with a number of natural disasters, including widespread floods and earthquakes. In addition, the country suffered a bloody terrorist attack on security forces and a number of fatal train derailments.

But perhaps the biggest shock was economic, and self-inflicted. The government demonetized 500-rupee and 1,000-rupee banknotes, accounting for 86 percent of the value of currency in circulation, and leaving many grappling with uncertainty. It is hoped that the economy will stabilize in 2017, yet aftershocks are lingering. Real estate – the traditional refuge of the “black money” that demonetization sought to flush into the open – saw fourth-quarter sales volume fall 44 percent year-on-year in the country’s eight biggest cities, according to a report by Knight Frank.

Meanwhile, domestic car sales fell by nearly 19 percent in December 2016. The Nikkei India Manufacturing Purchasing Managers' Index, which measures manufacturing sector performance through company surveys, fell to 49.6 in December 2016 – the first contraction in 12 months. “The vast majority of surveyed companies mainly blamed the downturn in new work and output, on cash shortages,” said Pollyanna De Lima, an economist at IHS Markit in London.

In January, the World Bank lowered its 2017 gross domestic product growth forecast to 7% from its earlier estimate of 7.6% in June 2016, while remaining optimistic for the medium and long term. The sentiments were echoed by ANZ Research, which estimates fiscal 2018 GDP growth at 8%. “We don’t think [demonetization] has led to any permanent supply disruption and expect a strong V-shaped recovery,” said Shashank Mendiratta, an ANZ economist in Delhi.

Voters will get a chance to judge the demonetization process this year with five state assembly elections are coming up for five states, two of which – Punjab and Goa – are strongholds of the ruling Bharatiya Janata Party party. Another election in BJP-controlled Gujarat is scheduled for November 2017.

India’s massive services outsourcing industry faces an uncertain future, with the re-introduction of a bill in the United States Senate that would place new limits on visas for short-term skilled foreign workers by raising the minimum annual salary to US$100,000 from the current US$56,000.

Indians in the information technology industry are the main holders of so-called H1B visas, and curbs on them could impact India’s US$143 billion IT services industry. “In the short term there will definitely be a jolt,” said Sanjoy Sen, a doctoral research scholar at Aston Business School in Birmingham, England, who specializes in Indian outsourcing.

“However, in the longer term most big and medium-sized IT firms should have no significant directional change," Sen added, expecting U.S. companies will instead re-assign workers to Indian subsidiaries, establish outsourcing centers outside the U.S., or pay higher salaries to key staff.

Tanvi Gupta is a master's degree candidate at the University of Hong Kong's Journalism and Media Studies Centre.