Dark clouds looming on the horizon

Is the Indian economy going to face headwinds? The answer for this question would be both yes and no. The concerns expressed by some economist and industrialists in this regard are not without reason. But the reason is not to be sought within India. It is more of a global phenomenon. The answer is yes and no, because no one knows how the Indo-Iran relations pan out vis-a-vis the US stand against Iran and its announced sanctions. Coupled with it is the internal situation which is witnessing a retail inflation. 

Latest official numbers paint a mixed picture of India's economy as factory output hit a 25-month high in November 2017 even as higher food and fuel prices along with rising wages pushed India's retail inflation to a 17-month high in December, breaching the central bank's medium-term target of 4 per cent for the second straight month. 

Consumer price inflation has been accelerating since December last, according to data released by the Central Statistics Office. It is being driven by higher inflation in eggs and vegetables prices at 9.48 per cent and 29.13 per cent, respectively. Prices of pulses fell 23.5 per cent year-on-year, softening for the thirteenth straight month at the fag-end of the 2017. Fuel and food inflation stood at 7.9 per cent compared to 7.92 per cent in November. Housing inflation stood at 8.25 per cent compared to 7.36 per cent in November. 

Prices of clothing and footwear went up 4.8 per cent over last year. Acceleration in retail inflation, amid a surge in oil prices, has increased the odds that borrowing costs will continue to rise sooner than expected. The RBI held its policy rate steady at 6 per cent for some time and said all possibilities were on the table, depending on how price pressures and growth panned out. Though the RBI has a medium-term inflation target of 4 per cent and has raised its inflation estimate to 4.3 per cent to 4.7 per cent for the six months through March, some analysts feel inflation could overshoot its estimates. 

This is causing worry to the Prime Minister Narendra Modi ahead of his last full-year budget due on February 1, as he hopes to win a second term in 2019. It has already been noted by economists that the rise in inflation is unlikely to translate into higher wages, given subdued demand for jobs in an economy which is forecast to grow at its lowest pace in four years.

While overall salary increases in India will outpace the rest of Asia-Pacific in 2018, if adjusted for inflation the rise will be much smaller and in fact lower than last year. While India's overall employment outlook for January-March has improved since the twin policy shocks of demonetization and the Goods and Services Tax (GST), most sectors are still weaker from the same period a year earlier. 

A relative lack of job opportunities is also being reflected in educational loans, where bad debt is rising. However, oil price volatility which will continue in future will have the potential to hit Indian economy.