NEW DELHI, August 14, 2018: The latest round of FICCI’s Economic Outlook Survey forecasts an annual median GDP growth at 7.4% for 2018-19, with a minimum and maximum range of 7.1% and 7.5%, respectively. The projection is in line with the estimates put out by the Reserve Bank earlier this month.
The median growth forecast for agriculture and allied activities has been put at 3.0% for 2018-19, with a minimum and maximum range of 2.4% and 4.3%, respectively. The favourable monsoons are expected to bode well for the sector. Although there has been some slippage in the monsoons during the months of June and July, updated forecast for August and September indicate a pick-up in rainfall. Further, industry and services sector are expected to grow by 6.9% and 8.3%, respectively in 2018-19.
The survey was conducted during the month of July 2018 amongst economists representing industry, banking and financial services sector.
The quarterly median forecasts indicate a GDP growth of 7.1% in the first quarter of 2018-19. The growth numbers for the first quarter are expected to be released by Central Statistical Organisation later this month.
With regard to inflation, the latest official numbers report prices edging up once again on the back of elevated fuel prices. However, the outlook of the economists on inflation seems benign. The median forecast for Wholesale Price Index based inflation rate for 2018-19 has been put at 4.8%, with a minimum and maximum range of 4.1% and 5.0%, respectively. The Consumer Price Index also has a median forecast of 4.8% for 2018-19, with a minimum and maximum range of 3.0% and 5.5% respectively.
On the external front, concerns remain with median current account deficit forecast pegged at 2.5% of GDP for 2018-19. Merchandise exports are expected to grow by 9.8% while imports are expected to grow by 14.2% during the year. The sharp increase in oil prices over the past year is likely to have repercussions on current account and fiscal account deficits. Also, trade tensions have escalated over the past few months with a whole host of countries undertaking retaliatory measures (China, Mexico, Canada etc.) in response to measures announced by the US. This has emerged as a key concern going ahead.
A majority of participating economists believe that an extension of the trade war beyond the short term can significantly impact India. It was mentioned that as inflation levels rise in the US on the back of higher domestic prices of imported goods, it may lead to a further increase in interest rates causing even greater outflow of foreign capital from emerging economies including India. Furthermore, an increase in tariffs by the US will make Indian goods less competitive and more so if India also plans to increase import tariffs.
Economists expressed fears that if countries fail to reach a consensus, the world risks a breakdown of a rule-based multilateral trade system which would greatly harm India’s interests. Nonetheless, some of economists felt that the US-driven trade war is temporary. It was felt that that the US would reconsider the new tariff structure and might, in fact, revoke many of the new tariffs in the medium term (by early 2020) before entering the general elections.
Moreover, the Rupee has been facing several headwinds and the Rupee-USD exchange rate depreciated to an all-time low in June 2018. The participating economist were asked to share their prognosis about the movement of Rupee in the near term and the likelihood of Re-USD exchange rate breaching the 70 mark.
The economists unanimously felt that Rupee will continue to be under pressure in 2018-19. It was felt that movement in oil prices and domestic as well as global economic developments will remain the two key swing factors for the Rupee.
While a rise in oil prices are already putting pressure on the current account, global uncertainties around trade and financial markets carry serious risks for the Rupee. Trade tensions between major economies is disturbing the global economic recovery.
On the domestic front, it was suggested that as India approaches state elections in late 2018 and general elections in early 2019, markets will price in a greater degree of political risk premium for the Indian Rupee.
Even though economists universally believe that the Rupee will remain under strain, they were divided on the argument whether the Rupee-US Dollar exchange rate could breach the 70 mark. Approximately half of the respondents felt that it was a highly probable scenario. However, they also agreed that the slip would be temporary in nature as historical evidence suggests that the Rupee tends to recover and move to its baseline trend. Almost all economists believe that any sharp weakening of the Rupee (with or without breaching the 70 mark) is unlikely to sustain for long.
Economists indicated optimism about the overall sentiment regarding the Indian economy and felt that favourable investor confidence and a promising long-term growth story will work in favour of bringing stability to the Rupee, going forward.
Majority of economists believed that the fair value of Indian Rupee vis-à-vis the US Dollar would be in the range of 65 to 66.
In addition, to redress the stress in the banking sector, the government and the central bank have been proactively taking several measures. The most recent one includes announcement of Project Sashakt – a five-point plan to help resolution of stressed assets. Besides the steps already taken, participating economists were asked to recommend alternative/additional ways which could strengthen the banking sector in the country.
Most of the economists felt that while all the measures taken so far are well intentioned and mark a paradigm shift in resolving NPAs, the process is still new and will take time to show requisite results. Some of them indicated a timeline of about four to six quarters before witnessing a visible progress in resolution of the problem.
Economists unanimously agreed that the government must work on bringing about reforms in the governance of public sector banks. In this regard, it was suggested that implementing the Nayak committee proposals could help in improving the functioning of the banks and create a more empowered board. It was also suggested that consolidation of banks along with privatizing some of them could instil better governance standards and should be seriously looked into.
Economists believed that making banks accountable for their performance through a transparent framework is of utmost importance. For this, it was recommended that banks must be advised to implement separate credit channel with specialised staff to deal with all types of loans from the beginning to the end.
In addition, a majority of the respondents believed that a fresh round of capital infusion is needed to meet greater capital requirements following stricter norms for NPA recognition by the RBI.
A few participating economists also felt that there was a need to bring in flexibility in hiring norms and focus must be laid on improving compensation to attract talented individuals. It was suggested that linking recovery of bad loans with incentives could also bring a desirable outcome.
Recent developments in the oil market have brought China and India together and two countries are contemplating to constitute an ‘Oil Buyers’ Club’ to counter dominance of OPEC in oil pricing. Given this backdrop, economists were asked to share their thoughts on whether the possible cooperation strategy between China and India will bring in greater energy security and recommend other solutions for achieving the same.
Participating economists believed that formation of an Oil Buyers’ Club would be a good move as it would substantially increase the countries’ negotiating power. China and India together account for more than one-fifth of the total world imports of crude oil. A cooperative arrangement between the two or even more oil importing nations such as Japan and South Korea will lead to a reasonable negotiated price rather than a price dictated by the sellers.
Further, since the two countries are likely to have a sustained demand for oil, it will be beneficial for all countries involved to enter into long term contracts to reduce the impact of volatility in crude oil prices. Economists suggested hedging of oil prices should be considered to limit the impact of volatility on the macroeconomic fundamentals of a country.
It was also suggested that the government must incentivise and encourage more private investments in domestic exploration and production of oil to reduce dependence on imports.
Economists recommended that India must simultaneously diversify its energy basket and shift to other cleaner, renewable sources of energy such as solar, wind, bio-gas etc. as well as adopt alternative technologies to meet its requirement. India could develop closer ties with countries that pioneer in renewable energy technology (like Iceland, Israel etc.) to develop its own energy sector.
