NDA’S Q2 eco­nomic threats re­cede, pol­i­cy­mak­ers need to be watch­ful

Shift in macroe­co­nomic out­look has been dra­matic from sec­ond to third quar­ter, mak­ing the task of pol­icy man­age­ment trick­ier REA­SONS TO CHEER


The eco­nomic head­winds that un­set­tled Prime Min­is­ter Naren­dra Modi’s ad­min­is­tra­tion in the sec­ond quar­ter and at the be­gin­ning of the third, com­pris­ing a weak ru­pee, high crude oil price and the threat of a widen­ing cur­rent ac­count deficit (CAD), have since abated even as a host of in­di­ca­tors showed a quick­en­ing of growth mo­men­tum.

The shift in the macroe­co­nomic out­look has, how­ever, been dra­matic from the sec­ond to the third quar­ter, mak­ing the task of pol­icy man­age­ment that much trick­ier.

To the re­lief of fi­nance min­is­ter Arun Jait­ley, the ru­pee, which tum­bled to 74.38 against the dol­lar on 11 Oc­to­ber, los­ing more than 16% from the start of the year, has now clawed back to the 69-70 range. On 2 Jan­uary, the do­mes­tic cur­rency was trad­ing in the 69-70 range against the green­back. The cur- Con­sumer price in­dex 4.17 2.33 Crude ooil 68.55 73.47 rency’s re­cov­ery of­fered im­mense re­lief to man­u­fac­tur­ers, wor­ried about los­ing their com­pet­i­tive edge due to costlier im­ported raw ma­te­ri­als and in­ter­me­di­ates. A weak ru­pee has of­ten been a tool for op­po­si­tion par­ties to at­tack the gov­ern­ment. In a ref­er­ence to Modi, Congress chief Rahul Gandhi had tweeted in Au­gust that the ru­pee “just gave the Supreme Leader a vote of no con­fi­dence, crash­ing to a his­toric low”.

Econ­o­mists said the im­me­di­ate threats had re­ceded but pol­i­cy­mak­ers needed to be watch­ful. “The risks to the econ­omy have now changed from short-term ones to medium-term ones,” said N.R. Bhanu­murthy, pro- /$ fes­sor at the Na­tional In­sti­tute of Pub­lic Fi­nance and Pol­icy (NIPFP), a New Del­hibased think tank.

To tame the threat of a bal­loon­ing CAD fu­elled by a weak cur­rency and high crude prices, Jait­ley had in­creased im­port tar­iffs first in Septem­ber-end and then in the sec­ond week of Oc­to­ber on non-es­sen­tial items such as tele­vi­sions, re­frig­er­a­tors, air con­di­tion­ers, jet fuel and tele­com gear.

With crude oil, which was at over $80 a bar­rel in Oc­to­ber, fall­ing to $52.28 on Fri­day, the CAD sit­u­a­tion now seems to be un­der con­trol.

In­dia’s CAD had ex­panded to 2.9% of its na­tional in­come dur­ing July-septem­ber from 2.4% in the pre­ced­ing three months.

In an in­ter­view broad­cast by the All In­dia Ra­dio (AIR) on Tues­day night, Jait­ley said the threat of high crude oil prices on ex­pand­ing CAD has re­ceded.

Aditi Na­yar, prin­ci­pal economist at rat­ings agency Icra Ltd said the out­look for ru­pee and the size of CAD would con­tinue to be in­flu­enced by the level of crude prices. “At present, we ex­pect the FY19 CAD to be around 2.5-2.6% of GDP,” said Na­yar.

But a weak global oil price could also be­come wor­ri­some. “Low in­ter­na­tional oil price in­di­cat­ing the de­mand-side chal­lenges in the global econ­omy will have im­pli­ca­tions to our ser­vices sec­tor. This is a medium-term chal­lenge we need to ad­dress,” said Bhanu­murthy at NIPFP.

Econ­o­mists said the im­me­di­ate threat from un­favourable macroe­co­nomic con­di­tions re­ced­ing into the back­ground is an op­por­tune time to fix long-stand­ing prob­lems in the agrar­ian econ­omy and the bank­ing sec­tor.

“The gov­ern­ment is well within its rights to look at short term mea­sures like farm loan waiver, but one should not lose sight of the macroe­co­nomic is­sues. It is de­sir­able to use the pe­riod of macroe­co­nomic sta­bil­ity to con­sol­i­date the gains from re­forms and take the steps needed in the agri­cul­ture and bank­ing sec­tors,” said Ra­jat Kathuria, di­rec­tor and chief ex­ec­u­tive of In­dian Coun­cil for Re­search on In­ter­na­tional Eco­nomic Re­la­tions.

One area of con­cern for the gov­ern­ment is the dis­in­fla­tion in food prices, which is af­fect­ing farm­ers.

The NDA gov­ern­ment is yet to take a call on a na­tional farm loan waiver, though it has not been ruled out. In the AIR in­ter­view, Jait­ley said that if any state gov­ern­ment wanted to an­nounce a farm loan waiver, it could go ahead.

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