Economy is Bouncing Back, but Crude Prices a Big Worry


The twin shocks of demonetisation and GST implementation have impacted India’s growth rate. Growth rate troughed at 5.7 per cent in Q1 of FY2018 but recovered subsequently. We may end the year with a respectable growth rate of 6.8 per cent. Low fiscal and current account deficits provided macro stability to the economy resulting in low inflation and exchange rate stability during 2017-18. This is in danger of being threatened by the recent spike in crude. What is in store for the economy in FY 2019 and beyond?

There are clear indications that the economy is on a rebound. There is a global consensus that India would re-emerge as the fastest growing large economy in the world in 2018. See the projections of IMF.

Global growth, according to IMF, rose to 3.7 per cent in 2017 – the most impressive growth since the Great Recession of 2008-09. IMF expects global growth to get better at 3.9 per cent for this year and next. As can be seen from the table, among the large economies, India is projected to achieve the best acceleration in growth.


Global Economic Outlook, Growth 2018, 19 (P): IMF

Country/Region 2018/2019
World output 3.9/ 3.9
Advanced Economies 2.3 /2.2
U S A 2.7/ 2.5
Euro Area 2.2/ 2.0
Japan 1.2/ 0.9
U K 1.5/ 1.5
Emerging & Developing Economies 4.9 /5.0
CIS 2.2/ 2.1
Russia 1.7/ 1.5
Brazil 1.9/ 2.1
South Africa 0.9/ 0.9
Mexico 2.0/ 3.0
China 6.6 6.4
India 7.4 /7.8


Globally, the environment for growth recovery continues to be favourable. US is powering ahead with an impressive growth rate of 2.7 per cent. Unemployment in US is a 40-year low at 3.9 per cent. Inflation is under control at around 2 per cent. Europe is stable and China is slowly decelerating. International trade has picked up assisting global growth recovery.

In India, GDP growth troughed at 5.7 per cent in Q1 of FY 2018 from there accelerated to touch 6.3 per cent and 7.2 per cent in Q2 and Q3 respectively. We are likely to end FY 2018 with a growth rate of 6.8 per cent. Growth is likely to accelerate to above 7.5 per cent in FY 2019. However, there are some major headwinds that might impact this expected recovery.

The major worry is the recent sharp spike in crude. Crude has risen by more than $10 a barrel since April. RBI had assumed a rate of $68 for 2018 but Brent crude is now hovering around $80. Every $10 rise in crude raises India’s inflation by 10 bp and negatively impacts GDP growth by 30 bp. Therefore, if the high prices sustain, India’s trade deficit, current account deficit and fiscal deficit will deteriorate. The ‘twin deficit issue’ will come back to haunt the policy makers.

There is no more room for passing the burden of the crude price rise on to the consumers. The Government has gone on record that excise reduction will be considered if crude goes beyond $75. Therefore, some excise duty cuts are on the cards. This is inevitable when elections are fast approaching. But the flip side of the excise cut is that it will expand fiscal deficit.

The benign inflation scenario, which the RBI projected in the last policy, is unlikely to last. RBI’s projection of 4.4 per cent inflation for FY 2019 assumed crude at $68. Apart from the crude spike, there are other important factors like the proposed hike in MSP, narrowing of the output gap and the depreciating rupee that will trigger inflation. The RBI will certainly turn hawkish in the June policy and the present trends indicate rate hikes this year. This is not good news from the market perspective.