Relentless Oil Rally Has Become Modi’s Big Opponent Ahead Of 2019
Relentless Oil Rally Has Become Modi’s Big Opponent Ahead Of 2019
(Photo: The Quint)

Relentless Oil Rally Has Become Modi’s Big Opponent Ahead Of 2019

Narendra Modi is entering the final year of his term as India’s Prime Minister. And the one factor that’s given his government windfall gains over the last four years is starting to turn against him – crude oil.

As Modi looks to revive an economy grappling with unemployment to lagging growth in rural India, a relentless rally in global oil prices is set to sour his party’s prospects ahead of the Lok Sabha elections in 2019, according to a recent report by Crisil. “A sharper-than-expected rise in oil prices will have a direct impact on current account deficit, through a higher import bill,” the ratings agency said in its report.

“Rapidly rising oil prices can push up both inflation and the government’s subsidy burden.”

Higher consumer price inflation will put further pressure on weak government finances and limit the Centre’s ability raise excise duty. It also adds to the probability of a hike in the benchmark interest rates. “All these can spook foreign investors and threaten capital flows, especially in the bond market,” Crisil noted.

Loading...
So far, low oil prices and distance from elections helped the government pursue a prudent policy stance. But with the situation now reversing, will the government be able to continue its focus on the ‘trend’ than the ‘cycle’?
Crisil

That’s bad news for Modi, who since coming to power in 2014, has effected an improvement in India’s macroeconomic indicators, according to Crisil. “The past four years of the NDA government have been a mixed bag of good luck on oil, raft of reforms and repair, disruptions, and slower growth,” Crisil said. “That script could run some more, but with some alterations in the narrative.”

A $10 per barrel rise in crude = Rs 6.5 lakh crore added to India’s import bill

And those aren’t the only hurdles in Modi’s final year. Generating employment still remains an “uphill” task and the investment cycle is yet to pick up with excess capacity lying idle at factories, Crisil said.

But ultimately, the proverbial Achilles’ heel for the Modi administration ahead of the 2019 polls could well be an “unhappy” rural India, the rating agency cautioned. Slower agricultural growth and poor price realisation have been hurting farmers' income in the country which is still dominated by agriculture. As the elections draw near, it would be hard for Modi to avoid the temptation of populist measures such as farm loan waivers which could add to fiscal pressures, it said.

That would make the government reliant on reforms to boost growth rather than relying on pumping cash upfront.

There is very little fiscal and monetary room for counter-cyclical policies to boost growth and these would not be very effective either as most of the problems plaguing the economy are structural in nature and can only be addressed through reforms.
Dipti Deshpande, Senior Economist, CRISIL

Fifth Year Estimates

Going ahead, the rating agency expects India’s GDP to grow at 7.5 percent in financial year 2018-19. The revival in growth is likely to hinge on consumption, with “mild support” from the investment cycle.

Real GDP Growth

The current account deficit is likely to widen to 2.5 percent of the GDP in financial year 2019 due to a wider trade deficit. CRISIL expects oil prices to average at $70 per barrel in 2018 from $54 per barrel in the previous year, thereby inflating the import bill.

Retail Inflation

Inflationary pressures are beginning to rear up, according to the rating agency’s estimates, projected to average at 4.6 percent in fiscal 2019. Rising consumption demand, lingering impact of house rent allowance revisions and higher global crude oil prices will likely be the key drivers of inflation, it said.

Current Account Deficit

(This article was originally published on BloombergQuint.)

(The Quint is now available on Telegram. For handpicked stories every day, subscribe to us on Telegram)

Follow our India section for more stories.

    Also Watch

    Loading...