The International Monetary Fund (IMF) said on Monday that the Indian economy will grow slower than what it had estimated just three months ago due to higher crude oil prices and speedier interest rate hikes.
Why was India’s growth outlook trimmed?
In its update to the World Economic Outlook, IMF said negative effects of higher oil prices on domestic demand and faster-than-anticipated monetary policy tightening by RBI were the key reasons for its downward revision of growth forecasts. According to The Economic Survey 2017-18, every $10 per barrel rise in the price of oil cuts economic growth by 0.2-0.3 percentage points, increases wholesale inflation by about 1.7 percentage points and widens current account deficit by about $9-10 billion.
How do high oil prices impact consumption demand and growth?
India’s economy was a key beneficiary of falling crude oil prices between 2013 and 2015, given that low oil prices incentivise consumption. In contrast, high oil prices mean you have to shell out more on your cooking gas cylinder and auto fuel. This leads to an income loss, which a person compensates for by cutting down on discretionary expenses. Higher fuel prices also lead to a rise in cost of transportation and gas-generated electricity, again eating into disposable income.
So is India still the fastest-growing economy?
Yes. Though China’s growth projections for 2018 and 2019 have been left unchanged, they are still lower than India’s latest growth estimates for the period.
Will the trade war launched by the US impact global growth prospects?
IMF has said escalating trade tensions pose an “important downside risk" to the global economy. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity, and by taking a toll on investment. However, it said that the contractionary impact will be minimal on the global economy.
What should Indian policymakers watch out for?
While higher oil prices will reduce fiscal space for the govt due to higher-than-anticipated subsidy outgo on kerosene and cooking gas, it will leave little scope for excise duty cuts on petroleum products in the run up to an election year. The govt has to also watch the depreciating rupee, which could feed into rising inflation, as well as on capital outflow due to higher yields in the US.