NEW DELHI: High crude oil prices, rising cost of crop procurement and a stubbornly-high level of bad loans have hurt growth prospects according to India Ratings, which has lowered the country’s growth forecast to 7.2% from 7.4% earlier this year.
“The key reason for this is the upward revision in the estimation of inflation for FY19 due to increasing crude prices and the goverment’s decision to fix the minimum support prices of all kharif crops at 1.5 times of the production cost,” India Ratings (IndiaRa) said in a statement. It added that besides there are other headwinds which include rising trade protectionism across the world and no visible signs of abatement of non-performing assets in the banking sector.
“Until March oil was flat and no one had expected it to behave the way it did. In July we realized that the headwinds particularly from oil could be severe for the economy as the price impact is passed through on a daily basis,” said Sunil Kumar Sinha, principal economis, India Ratings. According to Sinha given the lower growth prospects the central bank is unlikely to raise rates further during the current fiscal.
On the rupee, Sinha said that there continued to be a bit of overvaluation going by the real effective exchange rate (REER). “Sometime back the REER was 110% meaning that the rupee was overvalued by 10%. “The bigger concern is how orderly the depreciation takes place. Our assumption is that RBI may go for mobilizing dollars around December 2018 and look at raising around $25bn by way of non-resident bonds,” said Sinha.
According to Sinha an orderly depreciation would be good for the Indian economy in the long-term although there may be some knee jerk impact in terms of growth and inflation.
According to the IndiaRa report, the fiscal deficit target of 3.3% for the current year is likely to be met. However, there are challenges which include the fact that the deficit is already 70% of what has been budgeted for the entire year. Secondly, the government has not able to meet divestment targets thanks to the aborted sale of Air India and finally there is the loss of revenue due to recent reduction in the Goods and Services Tax rate in respect of 88 items.