Indian economy: Weather warning!

After almost 3 years of dream run, the Indian economy is going to face a harsh weather. The dream run of the Indian economy can mainly be attributed to some of the external factors such as low international oil price and relatively weaker dollar. But both are going to gather steam going forward disrupting the dream run.

The oil price will continue to rise above USD 50 as the political leadership of some of the most powerful and influential countries such as the USA and Russia will work in tandem to make sure that the oil price remains high. The current secretary of states of the USA- Mr Rex Tillerson, who is the former CEO of ExxonMobil, has spent his entire life in the oil industry and has a substantial interest and investment in oil assets. His close association with Kremlin and stake in Russian oil industry is also beyond reasonable doubt. A country such as Russia, whose economy is primarily dependent on oil export, would do everything possible, including influencing the American energy policies to jack up the international oil price. While a high international oil price would help the oil exporting nations, it will be a bane for oil importing developing ones such as India. Considering the higher sensitivity of inflation to the oil price, India is going to see a higher inflation stoked by a rising oil price. To add to this the dollar will continue to strengthen going forward after the recent signaling form US Fed of hiking the interest rate gradually from now on. A stronger dollar coupled with a higher oil price means that India will have to pay a much higher oil import bill, further widening the currently account deficit (CAD), adding stress to its economy.

While India can’t influence the international oil price, its government can certainly adopt and execute the right set of policies, to reduce its impact on the economy. The Indian government with a renewed electoral mandate is better positioned now than ever before to adopt innovative, disruptive set of policies to tackle the stubborn inflation before it goes out of control. India should learn from the mistakes of other developing nations such as Brazil in fighting inflation and stop its economy from going the Brazilian way.