The International Monetary Fund’s recent growth projection of 7.5 per cent for India in 2019, though marginally lower than its earlier forecast in April 2018, will be comforting for the Narendra Modi government. It comes at a time of slowdown in global growth, with the multilateral lender cutting its forecasts for the world economy in 2019 in its latest World Economy Outlook after a steady expansion in the previous year.
The BJP-led government certainly won’t mind, considering that a weakness in growth — specially in the Eurozone and other parts of the world — would mean low oil prices and a change in the pace of normalisation or monetary tightening too, rather than last year’s indications of multiple rate increases besides a stable local currency. Inflation, too, is well below the threshold of 4 per cent, thanks to low food and fuel prices, in sharp contrast to the macro economic scenario in October last year when Brent crude topped the $85 a barrel mark and the spectre of rising interest rates leading to pressure on the rupee.
Indeed, these fortuitous circumstances at a time when this government is headed for polls, with an uptick in growth in sight, appear to almost mirror the economic scorecard of early 2004 at the fag end of the term of the first NDA government led by Atal Bihari Vajpayee. Low food and fuel prices and a stable currency are positive for the economy in the short term but it will be foolish to expect that inflation will continue to be benign and that oil prices will continue to fall.
It is clear that the current food deflation is unsustainable which means taking a bet on interest rates here heading southwards may be risky. At the World Economic Forum meeting now underway in Davos, Switzerland, the IMF sounded a warning, saying that a number of triggers beyond escalating trade tensions could spark a further deterioration in risk sentiment with adverse growth implications.
It makes sense, therefore, for Indian fiscal policymakers as well as corporates to mitigate one of the biggest risks — oil prices — by budgeting for oil at over $80 a barrel. The flip side, however, of the blip in global growth is that it will cast a shadow on India’s exports.
From a broader growth perspective, India’s export engine needs to fire to provide macro stability and to boost jobs. But until the clouds lift and the threat of a downturn in some of the major economies recedes, it is imperative that the government carries out some repair jobs. That would include further work on the GST architecture and rates and ensuring simplification, faster resolution of distressed assets or bad loans, which will free up more capital for banks to lend to businesses, and fiscal rectitude.