While the demand slump, tepid investment growth and crisis in the non-bank sector will dominate finance minister Nirmala Sitharaman’s mindspace while she presents her second budget on 1 February, here are the three global factors she needs to take into account as well:
Volatile oil prices
While the spike in crude oil prices due to rising tension between the US and Iran was short-lived, the situation remains precarious. Though India has minimized its oil imports from Iran, tension in West Asia could again stoke oil prices leading to negative terms of trade shock for the second largest oil importer that could fan inflation and hurt demand further. Though the government has decontrolled petrol and diesel prices, it still subsidises cooking gas and kerosene for public distribution system. Higher oil prices also have an indirect impact via higher production and transportation costs and could exert upward pressure on food inflation. Any effort to cushion the burden on consumers by lowering the excise duty on petrol and diesel would adversely affect tax revenue collections.
The Economic Survey 2017-18 had estimated that every $10 per barrel increase in the price of oil reduces economic growth by 0.2-0.3 percentage point, increases wholesale inflation by about 1.7 percentage points and widens current account deficit by about $9-10 billion.
“Rising geopolitical tensions, notably between the United States and Iran, could disrupt global oil supply, hurt sentiment, and weaken already tentative business investment," the International Monetary Fund said in its World Economic Outlook update.
While the phase 1 trade deal between China and the US has calmed nerves, the trade war between the world’s largest economies is far from over. Any failure on the part of China to adhere to its promise could escalate the situation further. US president Donald Trump has now promised to turn to the European Union and Japan for trade deals, which could open new frontiers for trade tensions. “Further deterioration in economic relations between the United States and its trading partners (seen, for example, in frictions between the United States and the European Union), or in trade ties involving other countries, could undermine the nascent bottoming out of global manufacturing and trade, leading global growth to fall short of the baseline," the IMF said. India has its own bilateral trade issues with the US, both countries have so far failed to sign a limited trade deal. Rising trade tensions at a time India’s exports have fallen for fifth consecutive months could act as a negative shock to India’s GDP and tax collections.
New multilateral trade rules
Trump has upped the ante against the World Trade Organisation (WTO), blocking appointments to the apex dispute settlement body—the appellate body—thus leaving it dysfunctional. On Wednesday, he signaled his readiness for discussions with WTO chief Roberto Azevedo, vowing to dramatically alter the nature of the global trade body and targeted India and China for unfairly taking advantage of their developing country status under WTO rules. If the WTO rules are altered significantly, against India’s wishes, it could further erode India’s already weak trade competitiveness and merchandise exports.