New Delhi: India’s world-beating economic growth is running up against some big risks: high oil prices, emerging market stress as the era of easy money draws to a close, and policy paralysis in the run-up to next year’s federal election.
Those factors may push the rupee - Asia’s worst performer this year - even lower, as well as dampen some of the optimism that has propelled the stock market to record highs. They also serve as a reminder to investors that Asia’s third-largest economy, which has overcome the twin shocks of a cash ban and the chaotic introduction of a nationwide consumption tax, is not fully out of the woods yet.
Policy paralysis ahead of elections is also a threat investors will have to factor in. That together with a currency plumbing new lows and rising local interest rates could hurt consumption and throttle the recovery. Exports are separately at risk from the global trade war.
“The outlook for the remainder of the year is not as optimistic,” said Priyanka Kishore, head of India and South East Asia Economics at Oxford Economics Ltd. in Singapore. “Reform momentum is likely to slow ahead of the 2019 general election, as the government shifts focus to capturing votes.”
Data from last week showed gross domestic product grew 8.2 per cent in the three months ended June from a year ago, the fastest in nine quarters. For now, that number cements India’s position as the world’s fastest-growing major economy, putting it ahead of China.
While India’s share in world trade is relatively small, it isn’t entirely immune from global spats. Case in point: the oil price gain following proposed American sanctions on Iranian crude. Every $10 (Dh36.7) increase pushes up the inflation rate by 30 to 40 basis points and hurts economic growth of the world’s fastest growing oil user by about 15 basis points, according to Nomura Holdings Inc.
Add a weaker currency to this equation, and the problem gets compounded. Every rupee change in the exchange rate against the US dollar impacts New Delhi’s crude oil import bill by about Rs109 billion ($1.5 billion) on an annualized basis, according to the oil ministry’s Petroleum Planning and Analysis Cell.
Slower growth forecast from here on
The median of a Bloomberg survey of economists shows they expect the Indian economy to slow from here on. Economists forecast growth at 7.4, 7.1 and 7 per cent in the remainder three quarters of the financial year through March 2019.
That will put average growth a notch below the Reserve Bank of India’s forecasts of 7.4 per cent. The RBI appears confident that the domestic recovery is well entrenched with various indicators suggesting that economic activity has continued to be strong. It raised interest rates twice this year in a bid to curb inflation.
It’s not all gloomy though. In a sure sign that demand was holding up, companies have passed on higher input costs to consumers, amid a revival in investment activity and improving capacity utilization.
Pranjul Bhandari, chief India economist at HSBC Holdings Plc, says as the twin shocks of the cash ban and consumption tax fade, demand and production have picked up, even leading to some “overshooting” in growth.