Those that are keen observes of the country’s economics must be devoured in a sense of Deja vu seeing the developments in the past few weeks.
The present state of affairs in the country is reminiscent of what happened in 2013.
Oil prices soared up to over 110$ a barrel, which led to the rise in the domestic retail prices of petroleum products. The rupee was losing its ground. The current account deficit lies at a dangerous point of 4.8% and general elections were to happen in the country in a few months.
Even though some of the macro numbers are not as bad as in 2013 but it is almost a repeat what the country had faced back then.
There are no doubts that the conditions are challenging but not as bad as that in 2013. This is because of three main factors
The first and most important factor being that the growth is ascendant. Though demonetization and introduction of GST led to a downfall in the country’s economy this was somehow balanced. Last year the manufacturers had slowed down due to the introduction of GST but there was a considerable growth of 8.1% in the GDP in the first quarter of this fiscal.
The centre seems accountable of its fiscal responsibility; at least until now.
The fiscal deficit at present is at a very comfortable level of 3.3-3.5%, owing it to the fiscal management by the Centre or to the shares from the soft oil price regime of the last four years. Comparing this to 2013, the fiscal deficit was 4.9% and 4.5% in 2014.
The centre has declined to cast aside the fiscal deficit marker or to loosen the strings, despite calls from several quarters. It seems like the deficit may reach the magic level of 3% by 2021. The expenditure levels may increase in the election year but we haven’t seen any signs so far.
The Centre has been pretty instructive over the twin shocks of fall in the currency and rise in oil prices. Even with the extensive pressure of the media to reduce the oil prices and introduce reforms in the excise duty the centre has been working at its own will and allowed the consistent rise in prices. The Centre’s total revenue is gained from fuel taxes, and any cut will adversely impact the fiscal deficit.
Similarly, the response of RBI and the Centre over the rupee’s fall has been very cautious. The rupee has been allowed to fall to its mark and the bank has come forward only to ease the volatility. No reactionary measures have been taken, similar to what happened in 2013.
Finance Minister Arun Jaitley has been very firmly holding his stand that this fall in the currency is more a result of the global factors than the domestic ones. He not for once has publically shown his discomforts and has rather come forward with the point that rupee is not alone in this predicament.
The combined impact of an increase in oil prices and the fall of rupees can have a severe damage to the country’s economy. Though the biggest risks are the external factors sure they will have a big impact on the country as well. This could lead RBI to front-load its second rate hike for this fiscal very soon.
Consumer spending that rose to 8.6% in the first quarter of this fiscal may face a heavy blow as the consumers will limit their spending to cope up from the twin shocks of rising fuel prices and higher interest rate. This will adversely affect the GDP growth, especially because the private investment is still in the recovery phase.
Though the RBI may have allowed the rupee to fall until now it is evident that any further fall will be defended, which implies to a drain on forex reserves. With such a scenario, Centre may also be forced to cut taxes on fuels with obvious impact on the fiscal.
The country is in a serious economic struggle and with elections ahead, everything seems rather more indefinite.
But there is no mistaking the strong underlying growth impulse supported by a return of consumer spending.
Finally, there is no saying what one Donald Trump would do next. The tariff war that he has set off has thrown challenges for India as well. In sum, these are piquant times indeed for the economy.
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