As the Narendra Modi-led government enters into the final fiscal year prior to general elections, a report by IIF (Institute of International Finance) says that while the economic growth outlook is improving, downside risks from imperfections in GST, corporate restructuring and debt overhang continue to weigh. According to the report, economic prospects point to increasing growth after a slowdown caused by structural reforms of demonetization and GST implementation. Taking stock of the economy, IIF said that the domestic demand should improve further, while net exports have declined amid rising imports.
“Foreign capital inflows are supporting the external position, though the current account deficit is expanding due to greater oil and non-oil imports, which will pressure the rupee to weaken,” the report said. IIF says that the public perception about the country’s economic performance and policies under the current government are likely to play a major role in the election cycle. We take a closer look at key risks facing the economy.
Rising global crude oil prices
With rising crude oil prices, the oil marketing companies have announced a hike in petrol and diesel prices, pushing rates to a near-five year high and all-time high respectively. According to IIF, a faster pickup in oil prices could necessitate increased subsidy expenditures, translating to lower capital expenditures which could stall needed infrastructure improvements and potentially spill over to private investment.
Rising current account deficit
With the current account deficit expected to widen in the current year leading to increase in domestic prices, IIF says that the trade deficit could dent consumption, hampering investment and productivity gains. According to the report, the risks to a wider current account deficit would increase depreciation pressure on the rupee.
Imperfections in GST
IIF says that Imperfections in GST implementation still linger, which include the need to speed up input tax credit refunds. The report says that public perception of the country’s economic performance and policies under the current government are will be key in the upcoming elections. “A series of state elections over the coming year should provide a proxy for public views ahead of general elections in 2019,” it said.
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