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HomeArticlesIndian Economy Uncontrolled oil prices offset all claims of the Government
Monday, 13 May 2019 11:45

Indian Economy Uncontrolled oil prices offset all claims of the Government

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Recently, the apex bank RBI’s Governor Shaktikanta Dass said the country’s economy needs to pick up to around 8% to deal with poverty and other challenges. He however added that the past few years’ average growth of around 7.5% was impressive. Dass added that more structural reforms are required in areas such as land and labor. 

“India is expected to post real economic growth of 7.2 percent in the FY 2019-2020, and is seeing below-target inflation even as rising oil prices add an upside risk. The inflationary impact from spikes in crude, India’s biggest import, can be exaggerated.”

The RBI Chief added: “If there is a temporary spike of oil prices and again it comes down, then obviously the impact gets moderated.  Any sustained increase in crude prices will definitely have an impact on inflation, but we have to see how sustained it is.”  

As per many financial experts oil may kill the bird. Price hike of oil over the longer term may hurt country’s growth as well as its current account deficit; it will also pull down rupee. 

Though the apex bank reduced interest rates by a quarter-percentage point recently, it still retained its neutral policy stance. 

Dass said: "Our priority is to remain watchful and take coordinated action to revive growth, and maintain macroeconomic, financial and price stability."

The RBI also lowered the growth forecast for the fiscal year that began April 1 to 7.2% from 7.4% seen previously. It also expects headline inflation and underlying price pressures to remain subdued in coming months, giving it some more room to lower rates.

Investors are not interested as country’s has one of the highest real rates of interest in Asia. Many companies have also stayed away from borrowing ahead of a general election which started on 11 April and will run for nearly 40 days; the results will be known on May 23, 2019.

Investors are still not happy over RBI’s pace of easing norms as crude has been at a five-month high. The RBI’s rate-setting panel had cut rates by 25 basis poi nts each in February and April 2019 to support the economy. However despite several measures, headline inflation quickened to a five-month high of 2.86 % in March from 2.57 % in February 2019.

As per RBI, inflation forecast is to a range of 2.9 % to 3 % in the April-September period, compared with a February projection of 3.2 % to 3.4 %, while seeing price growth this year within its 4 % medium-term target. It separately cut economic growth forecast to 7.2 % for the year that began on April 1, down from 7.4% previously.

As per Dharmakirti Joshi, chief economist with Crisil Ltd. in Mumbai, “The recent rise in crude prices, if sustained, could pose a challenge to both economic growth and inflation outlook.”

As per RBI, $10 rise from $65 a barrel will lead to a 49 basis points increase in headline inflation, while a similar increase from $55 a barrel would give around a 58 basis-point boost to consumer prices.

 

Falling GDP:

The advance gross domestic product (GDP) estimates, released on February 28, showed the growth slowing to 7 percent in 2018-19 from 7.2 percent a year ago. This quarterly data showed a sharp decline in growth to 6.6 percent in the last quarter of 2018 from 7 percent and 8 percent in the preceding two quarters.  

 

Weakening Rupee: 

Rupee is just not heading towards strength due to rising oil prices. The rupee climbed 2.3 % against the dollar in March 2019, which was the best performance in Asia. The currency is up more than 7 % from its October low, leading to a view among experts that some of the impact from the rising currency could help ease inflation.

As per a research paper, 1 % change in the exchange rate translates into a 15 basis-point move in headline inflation over a period of five months. There might be space for 25 basis points of rate in 2019 given the benign near term headline trajectory. 

Rising oil prices successfully eroded the impact of rupee appreciation to a large extent.

 

IMF Forecast& suggestions: 

As per the International Monetary Fund’s latest edition of World Economic Outlook, in 2017 and 2018, though, commodity and crude oil prices edged higher, resu lting in a cumulative drag of 2.3 percent of GDP on India’s growth. However, the forecast for 2019 and 2020 says that crude prices will weaken and India’s windfall gain which will be an average of 0.34 percent of GDP for these years. 

Country’s GDP growth went up in 2015 and 2016, fell in 2017 and 2018, and is projected to be higher again in 2019 and 2020. It is all related to the ups and downs of crude oil prices, though there are a host of factors affecting growth. 

The IMF says real GDP growth will move up to 7.3 percent in the current fiscal from 7.1 percent in 2018-19. Investment demand will see a minor recovery to 31.7 percent from 31.6 percent of GDP in 2018-19. That is nowhere near the 39 percent investment peak rate seen in 2011 and well below the 34 percent investment-to-GDP rate seen in 2014-15. 

As per IMF report, inflation is expected to average 3.9 percent this fiscal, higher than last fiscal, but still below RBI’s target of four percent. That will keep interest rates low. The IMF feels that the overall fiscal deficit, including that of states, is going to rise this fiscal to 6.9 percent from 6.7 percent last fiscal. Inflation is expected to remain under control in spite of the higher deficit.

The IMF says, “Growth in India is expected to stabilize at just under 7.34 percent over the medium term, based on continued implementation of structural reforms and easing of infrastructure bottlenecks.” 

The IMF suggests: “Continued implementation of structural and financial sector reforms with efforts to reduce public debt remain essential to secure the economy’s growth prospects. In the near term, continued fiscal consolidation is needed to bring down India’s elevated public debt. This should be supported by strengthening Goods & Services Tax compliance and further reducing subsidies.

It adds: “Important steps have been taken to strengthen financial sector balance sheets, through accelerated resolution of non-performing assets under a simplified bankruptcy framework. These efforts should be reinforced by enhancing governance of public sector banks. Reforms to hiring and dismissal regulations would help incentives job creation and absorb the country’s large demographic dividend. Efforts should also be enhanced on land reform to facilitate and expedite infrastructure development.”

 

Missed tax collection target: 

The government has missed the tax collections target by over 1 trillion rupees ($14.41 billion), including about 500 billion rupees drop in income tax receipts, as per media sources. The country has met the fiscal deficit target of 3.4% of gross domestic product in 2018/19 fiscal year ended March 31, by cuts in state spending and higher borrowing from small savings funds, a government source revealed on 9 April.

 

NYAY: The Congress’ ‘Brahmashtra’:

The Congress party's promised minimum income guarantee initiative (`6000/month to each of 5 crore poor families), NYAY (Nyuntam Aay Yojana) has created a lot of buzz in ongoing general election. Commenting on it, the former Finance Minister and Congress leader P. Chidambaram said that complete rollout of NYAY will cost about 1.8 per cent of India's GDP.

He added: "We will identify the poorest 20 crore families of India. There would be about 5 crore such families with an average size of five members per family. Hence, this scheme will be benefitting 25 crore people of India. The scheme of this kind could not have been implemented 20 years ago. Today, thanks to liberalization that was launched by the Congress government in 1991. We believe that the Indian economy has the capacity to implement such a scheme."

Talking on economy, he said: "The size of India's economy today is 200 lakh crore and in nominal term, this size will increase by 12 per cent every year and in about six years it will be double. Hence, the five year period -- starting 2019 and ending 2024 -- the size of India's GDP would have grown close to 400 lakh crore. The amount available to Central and state government will practically double in five years. We have taken into account all factors including the income of different sectors, consumption factors, etc. We have concluded that the Government of India and states should provide ` 6000 per month to each of five crore families."

 

Counter attack: 

Countering the Congress Party, FM ArunJaitley said: “Rahul Gandhi doesn’t know the difference between the size of the budget and the size of the GDP. He said they will spend 6% of GDP on education and 3% on health, which means that out of the total budget of ` 27 lakh crore, we will spend ` 18.9 lakh crore on this.”

Our GDP is estimated at ` 190.5 lakh crore in FY19. Spending about 10% of GDP on health and education would be about `19 lakh crore, which would account for most of the ` 27 lakh crore budget.

 

Way Forward: 

On 23 May, 2019, a new day will be dawned upon the country when either the BJP led or the Congress-led Government will take the reigns of the country. It would be interesting to see what new strategies the new government comes up with to take the current state of Indian economy out of oil crisis and bring some crucial GST reforms as well as offset the effect of demonetization which has brought the sectors like real estate to a halt.

Many crucial reforms are needed to check inflation and attract investors in different sectors. Unless and until, favorable, safe and prosperous prospects are not in place, we would hardly se major foreign investors in the country.   

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