Oil prices on the rise; unless Centre ups spend, economy set to get hurt

Rising prices of crude oil, higher local inflation and slim chances of lower interest rates threaten to rein in the economy even as the performance in 2017-18, so far, points to a muted recovery. While the worst may be over, unless the government keeps up spending in 2018-19, the economy may see middling growth in the next few quarters. India’s GDP growth slowed to a 13-quarter low of 5.7% year-on-year in the April-June period but recovered to 6.3% y-o-y in the July-September quarter.
Despite a small base, many segments of the economy haven’t really reported meaningful improvements so far. For instance, railway freight (in tonnage) has increased by just 4.7% between April and October. Also, the M&HCV segment, a proxy for the economy, reported a growth of just 1.2% y-o-y between April and November, on a negative base. The biggest disappointment has been exports which have grown just 12% in FY18 thus far; in the corresponding period of FY17 they had stayed virtually flat. Economists expect a slight deterioration in the current account balance, should oil prices move towards $70 per barrel, from current levels of about $65 per barrel, with the possibility of the balance of payments turning negative in 2018. Moreover, it would stoke inflation leaving the central bank with little option but to hold interest rates. Consumer inflation came in at 4.88% for November, the highest in 15 months. Another big worry is the distress in rural India a big consumer of goods, even though both the kharif and farm harvests should be reasonably good. On the positive side, they believe growth would normalise over the next four or five quarters as the impact of demonetisation and the GST rollout fades. While the liberalised rules will make it easier for firms to comply with the provisions, the cuts in the tax rates under GST and the higher level of cash in the system, they feel, would stimulate demand.