Indian economy in grim situation

Siddharth Tak/Rohit Joshi/ZRG

The eternal optimists might be in for a setback! The Indian economy looks set for an ominous dive down with the double impact of rising crude oil prices globally and a downward spiraling domestic currency.

While, crude prices are hovering around 105 dollar per barrel, Indian rupee has breached the level of 61 against the dollar. This has primarily raised risk of higher wholesale price index (WPI) inflation in the coming months. Furthermore, food inflation will be impacted by higher crude prices owing to the higher transport costs. This is visible already in skyrocketing vegetable and food prices.

Since the start of the current fiscal, Indian rupee has depreciated by nearly 10 per cent and has recently touched an all-time low of 61.21. According to Nomura estimates, a 10 per cent depreciation of the rupee is expected to increase WPI by 0.6-0.8 per cent. Furthermore, about 35 per cent of the commodities which make up the WPI basket are global commodities with fuel and power component being a big drag with 14.9 per cent weight in the overall WPI chart.

The International Monetary Fund (IMF) has recently downgraded India’s growth projection for the current fiscal by 0.2 per cent to 5.6 per cent which is tad below RBI’s projections of 5.7 per cent.

Outlining out the weakness in the economic fundamentals, Sunil Sinha, head of economic research and chief economist at rating agency Crisil, said, “Although Chidambaram has been the new finance minister for the last 10 months yet his initiatives do not seem to be working out well. While, on the domestic front nothing has much changed on the ground, globally too things have not improved for India.” Sinha, however, exuded optimism that in the medium to long term Indian growth story would be intact because of the demographic dividend. However, in the short term fundamentals are certainly weakening with each passing day, he apprehended.

Agreeing with the view that Indian economy is going through tough phase. Brinda Jagirdar, consulting economist (former chief economist at SBI) argued, “It is likely that fundamentals of the economy could deteriorate in case policy measures are not put in place quickly. There is still time for us to act. Policy implementation will help the economy to stabilize and prevent the deterioration.”

In sync with the view, DK Pant, chief economist at India Ratings said, “Yes, no doubt hardening crude prices (due to political unrest in Egypt) will make some dent on the economy. Although things are difficult and there are pressures like rupee depreciation yet it is not doomsday for the Indian economy as of now.”

However, rupee depreciation has indeed led to upside risks to inflation. According to Crisil report, if the rupee averages Rs 58 per dollar in 2013-14, average WPI inflation in 2013-14 might rise to 6.0 per cent compared to its baseline call of 5.3 per cent. As per the latest data, WPI inflation fell to 4.7 per cent in May, 2013.

Sinha at Crisil said, “WPI may not actually go back to double digits but the declining trend which we have witnessed in the last few months might halt and it may escalate gradually. Increase in oil prices will lead to higher fuel prices. This will lead to increase in transportation cost which will again impact the prices of vegetable and essential commodities. Furthermore, rupee depreciation will negatively impact the consumer durables as they use lot of imported components.”

Sinha’s thought got an endorsement from Pant at India Ratings who averred, “As India is a net commodity importer hence there will be an adverse impact on inflation and overall subsidy bills.”

Rupee depreciation leaves little room for monetary easing despite the sharp slowdown in GDP growth. Analyst community agrees with the fact that in order to turnaround the economic growth rate policy measures should be taken timely.

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