Govt should not lose sight of headwinds facing economy

It must deal with rising oil prices and capital outflows, avoid fiscal slippages

While national attention is on Karnataka, it is important not to lose sight of the growing headwinds facing the economy. The most significant is, of course, oil. Brent crude is now almost at $80 per barrel, a level last seen in October 2014. The second is capital outflows from emerging market economies (EME) on account of rising interest rates in the US; 10-year government bond yields of 3.1 per cent there are at the highest since July 2011. Both have profound implications for India. Low global oil prices helped slash the country’s current account deficit from $88.16 billion in 2012-13 to $15.30 billion in 2016-17. That number is likely to have touched $50 billion in 2017-18 and could cross $75 billion if oil continues to rule firm. As for capital outflows, foreign portfolio investors have since April made over $4.9 billion worth net sales of equity and debt in Indian markets, even as the RBI’s forex reserves have depleted by $5.6 billion during this period.

All this has impacted the rupee, which, on Tuesday, fell to a 16-month low of 68.11-to-the-dollar. With general elections less than a year away, there will be pressures for loosening fiscal purse strings and hiking minimum support prices for crops without giving a thought for its attendant inflationary consequences. Succumbing to these would not just erode the gains of the last four years, but also invite retribution from the markets — more so in today’s volatile global economic environment.