Opinion DC Comment 22 May 2018 Is India’s eco ...

Is India’s economy headed for iceberg?

DECCAN CHRONICLE.
Published May 22, 2018, 1:24 am IST
Updated May 22, 2018, 1:24 am IST
The last Budget by the NDA government was seen neither as people-friendly nor business-friendly.
Representational image
 Representational image

High oil prices aren’t the tip of the iceberg, they’re more like the iceberg itself, towards which the Indian economy’s ship seems headed. The good times may be over for major oil importers like India. But beyond the rising cost of a barrel of oil, with less produced by Opec and others raise yields, what should worry India more is the rupee’s falling value. This isn’t just a corollary of rising oil prices. The whole economic basket can be upset if oil prices stay high, as we’ve often seen in history. The rupee’s fall, from Rs 65/$1 in January to Rs 68 and possibly Rs 70 soon, means oil imports in dearer dollars hurt more. With scary estimates of $25-50 billion import bill hike due to the oil price spike beyond $80/barrel, the fears may be justified. And the days of $100/barrel may not be far.

The triple whammy of high oil prices, a falling rupee and a higher current account deficit has been faced before. Where it may hurt now is that in the days of low oil prices, the Centre and states enjoyed the windfall by raising excise and VAT and didn’t let too much of it to trickle down to the people. Economics experts in the administration say that macroeconomic fundamentals are sound and the fiscal deficit is still under control, and the growth parameters strong. The question is: will the triple whammy undermine the fundamentals to a great extent when the business environment is just about improving after the twin hits of demonetisation and the hasty implementation of GST, some of which is at unconscionably high levels, about which only the government can smile, but only at the cost of the people.

 

The other hazard for India is that the general election is barely a year away. While inflation will ensure that bank rate determinants remain hawkish, the State, which seemed to do so well on oil taxes, will now be tempted to loosen the purse strings and go into freebie mode. Fiscal discipline is known to wilt at a whiff of elections as populist measures become vote-catchers. The stock markets are not the ultimate indices of the health of the economy. There too, a flight of foreign  investments is possible as Rs 18,000 crore exiting in just the month of May. The last Budget by the NDA government was seen neither as  people-friendly nor business-friendly. The way forward, with a widening trade deficit a given thanks to the spike in oil prices, remains fuzzy. Not even sacrifices in excise by the Centre and the states to lower or at least rein in the lifetime high prices at the pump may do enough for public  confidence, even if the macroeconomics are very sound as the government would like to believe.

 

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