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Looking for reasons for the slowdown in the Indian economy? The International Monetary Fund’s latest edition of its flagship publication -- World Economic Outlook -- provides us an important clue. It says falling commodity and crude oil prices provided an opportunity for the Indian economy in 2015 and 2016. These windfall gains amounted to a cumulative 4.3 percent of GDP in the two years.
In 2017 and 2018, though, commodity and crude oil prices edged higher, resulting in a cumulative drag of 2.3 percent of GDP on India’s growth. The forecast for 2019 and 2020: happy days are back, crude prices will weaken and India’s windfall gain will be an average of 0.34 percent of GDP for these years. And guess what -- India’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.
The correlation with the ups and downs of crude oil prices is clear. Sure, there are a host of factors affecting growth, but what the data underlines is the importance of low crude oil prices for the Indian economy.
What else does the World Economic Outlook say about India? It 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. There doesn’t seem to be much hope of a rapid turnaround in capital expenditure. The details are given in the accompanying chart.
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.
Interestingly, 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.
In line with the IMF’s forecast that trade restrictions will lower global growth rates, India’s volume of exports of goods and services is expected to grow more slowly in 2018-19. Import volume growth, though, is expected to increase, probably as a result of higher growth.
One big reason why inflation will remain subdued is because average crude oil prices are forecast to be 13.4 percent lower this year. That kind of precision in predicting oil prices is impossible, but at least the IMF thinks they will be lower, which, as we have seen above, is a big relief for India. Non-fuel commodity prices too are expected to be soft this fiscal.
The IMF says, “Growth in India is expected to stabilise at just under 7.34 percent over the medium term, based on continued implementation of structural reforms and easing of infrastructure bottlenecks.” What do we need to do to sustain that growth rate? Says the WEO, “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.
“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 incentivise job creation and absorb the country’s large demographic dividend. Efforts should also be enhanced on land reform to facilitate and expedite infrastructure development.”