Indian Economy Facing Several Pools of Uncertainty

By:Manmeet Kaur Tura 2018-11-20

The Indian economy is focusing on a gradual upward path but the liquidity crunch along with the oil crisis, trade wars and Federal Reserve action has put it in an uncertain position. Looking at the GDP, the real sector seems good but with the financial indicators being different from what they were till March 2018, the IIP and core sector growth is very uncertain and unstable.

Taking a closer look, it does seem that the GDP growth will move up to the 7.5% mark with a downside risk in case the current liquidity crunch affects potential investment. Industrial growth will be one of the drivers of the economy with growth between 5-6% for the year. The trend of a speedy growth due to the low base GST effect has gotten weak and the future growth will be dependent on higher spending. This was observed during the recent ‘festival sales’ of two leading e-tailers and the major point of concern is whether it will sustain or not. The third quarter results of companies will provide us with a clearer picture.

The issue that is of concern is that the investment on the private sector side has not really caught on. This is reflected from a lower credit take from manufacturing, services as well as bond issuances. The limited investment is from the government that is also facing an issue of lower GST collections which are likely to come in the way of balancing the budget entailing curs in capex. The low stock market conditions do not seem fruitful for future disinvestment and with the insurance companies already saving the financial sector, the ability to finance this project as well will get increasingly challenging.

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The variable which needs to be considered is oil price. A turnaround of direction to the pricing of around $70 a barrel will result in the much required equilibrium. Future inflation will be effected primarily by this factor which is also connected to the exchange rate that has been stable lately in the 73-74 range but move as per the global waves and current account deficit. An exchange rate of approximately $ 70-71/$ seems fair in the present scenario, at the same time the FPI flows too will have to be monitored along with the CAD. FPI have gone negative with the QE coming to a close and interest rates soaring up in the USA. This will prolong as a pattern and will pressurize the rupee. It will be an immediate threat for inflation and collective with the MSP driven linkage it will account for CPI inflation of above 5%.

High inflation or potential high inflation  shall result in the possibility of RBI lowering the interest rates can be struck out. It will be a dilemma as to whether or not and to what extent the RBI will increase the repo rate. Therefore, the path towards the next year will be watchfully positive with every step being calculated and the possibility of rough terrains in different corners being the negative aspect. 

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