Shankkar Aiyar, Visiting Senior Fellow at IDFC Institute, writes on the threats facing the Indian economy, in this New Indian Express article. Excerpts:
A week, it is said, is a long time in politics. So it is for the economy. Even as the politicos were busy with the floor test in Karnataka, high-frequency indicators in the economy were testing new floor levels.
This week the rupee tested the Rs 68 mark for the dollar—for sure this level has been crossed before, but what is significant is the belief that the slide will persist.
It has slipped from around Rs 65 in January, and market forecasts estimate the value of the dollar in the coming weeks could rise to around Rs 70 and even more. Crude oil prices, specifically Brent, have crossed the $80 per barrel mark. Unsurprisingly, the bond markets reacted to reflect the consequences. The benchmark for a 10-year bond yield touched 7.73 per cent—propelled by expectations of higher interest rates and higher borrowing by the government at the Centre.
This government came to power when crude oil prices were over $104 and the macros were in disarray. The fortuitous sharp fall in crude oil prices post-November 2014 delivered a lucky break and over `2.5 lakh crore a year in cash flow—in savings and revenues.The favourable factors that enabled repair of the fiscal math, created revenues and sustained consumption have flipped. In May 2018, global and local factors have triggered a spectre of headwinds. The Indian economy faces a triple whammy—of higher cost of dollar, higher import bill and higher cost of capital given the vulnerability and probability of higher current account and fiscal deficit ratios.
Read the full article here.