​​​
  1. Oil prices on the rise; unless Centre ups spend, economy set to get hurt

Oil prices on the rise; unless Centre ups spend, economy set to get hurt

Rising prices of crude oil, higher local inflation and slim chances of lower interest rates threaten to rein in the economy even as the performance in 2017-18, so far, points to a muted recovery. While the worst may be over, unless the government keeps up spending in 2018-19, the economy may see middling growth in […]

By: | Published: December 18, 2017 5:14 AM
oil price, GST, economy Rising prices of crude oil, higher local inflation and slim chances of lower interest rates threaten to rein in the economy even as the performance in 2017-18, so far, points to a muted recovery.(Image: Reuters)

Rising prices of crude oil, higher local inflation and slim chances of lower interest rates threaten to rein in the economy even as the performance in 2017-18, so far, points to a muted recovery. While the worst may be over, unless the government keeps up spending in 2018-19, the economy may see middling growth in the next few quarters. India’s GDP growth slowed to a 13-quarter low of 5.7% year-on-year in the April-June period but recovered to 6.3% y-o-y in the July-September quarter.
Despite a small base, many segments of the economy haven’t really reported meaningful improvements so far. For instance, railway freight (in tonnage) has increased by just 4.7% between April and October. Also, the M&HCV segment, a proxy for the economy, reported a growth of just 1.2% y-o-y between April and November, on a negative base. The biggest disappointment has been exports which have grown just 12% in FY18 thus far; in the corresponding period of FY17 they had stayed virtually flat.

Economists expect a slight deterioration in the current account balance, should oil prices move towards $70 per barrel, from current levels of about $65 per barrel, with the possibility of the balance of payments turning negative in 2018. Moreover, it would stoke inflation leaving the central bank with little option but to hold interest rates. Consumer inflation came in at 4.88% for November, the highest in 15 months. Another big worry is the distress in rural India a big consumer of goods, even though both the kharif and farm harvests should be reasonably good. On the positive side, they believe growth would normalise over the next four or five quarters as the impact of demonetisation and the GST rollout fades. While the liberalised rules will make it easier for firms to comply with the provisions, the cuts in the tax rates under GST and the higher level of cash in the system, they feel, would stimulate demand.

Moreover, the Rs 2.11-lakh-crore recapitalisation of banks’ balance sheets, announced by the government in late October, would set the stage for renewed lending. The rise in bank loans has been modest though there is a fairly sharp jump in borrowings from the bond markets, accessed both by companies and non-bank financial companies (NBFCs). Economists at Deutsche Bank believe real GDP growth could bounce back to 7.5% in 2018-19 from a possible 6.6% in 2017-18, supported by strong consumption spends and some pick-up in private capex activity. Gross fixed capital formation (GFCF) slipped to 26.4% of GDP in Q2FY18 from 30.4% in Q1FY16.

Companies remain highly leveraged. A study by Credit Suisse showed for the September quarter the share of debt with companies that have an interest cover of less than one saw little change at 40% compared with 42% in the June quarter even as the aggregate interest cover improved sequentially to 2.4 times on the back of a growth in operating profit or ebitda of 4%.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Go to Top