The robust 8.2 per cent GDP growth rate in the first quarter of this year suggested India is once again stepping into a high growth orbit. But a set of connected issues — a widening of the current account deficit, a sharp slide in the rupee and higher vulnerabilities in the external sector — now threaten to snowball. The impact of these may likely prompt the government and the central bank to take steps that could dampen the growth prospects in the full year. To further complicate the situation, national elections in April-May 2019 may force the government to take political calls, as against rational economic decisions. This will derail the serious efforts of the past four years to consolidate government finances and retain the fiscal deficit at a respectable level of 3.3 per cent of the GDP.
The current account deficit has widened to 2.4 per cent of GDP in the April-June quarter this year and is expected to end the financial year higher at 2.6 per cent of GDP. In the last 12 months, the rupee has depreciated by over 13 per cent, which means India spends more rupees for crude oil imports, the price of which is likely to remain high in the coming months. To assuage consumers, the Central government did reduce excise duty on petroleum products, and also asked state-owned oil marketing companies to take some burden on their books. Several state governments too cut sales tax/ value added tax on fuel products. But all these actions are essentially credit negative, and go against the grain of fiscal prudence, the sole indicator that global credit rating agencies closely monitor while assessing sovereign credit rating.
While the government turns to political pragmatism, the Reserve Bank of India has already turned hawkish with its monetary policy committee shifting to a “calibrated tightening stance”. The outlook on inflation is not so benign either given the continuous rise in oil prices and the hike in minimum support price of agricultural products. The RBI did not hike the policy rate when it met last Friday, but inflation is inching up and may touch the 4 per cent mark soon. In September, data for which was released this Friday, inflation was up marginally at 3.77 per cent. The index of industrial production (IIP), again data for which was released Friday, has decelerated to a three-month low of 4.3 per cent. With inflation targeting as its mandate, the RBI may have to tighten its monetary stance, which again will hurt demand. Under the circumstances, the government needs to dig in its heels, not succumb to temptations to spend more, and let the fisc get out of hand.