Macro troubles: Why the Indian economy faces an ominous New Year in 2018
Just as growth appears to
be no longer a pressing problem, another familiar threat has reappeared:
India's macroeconomic numbers don't look quite as stable as they should.
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NEWS : You’d think the Indian
economy had returned to rosy health. It seems to have recovered from two
enormous disruptions -- Prime Minister Narendra
Modi’s decision just over a year ago to withdraw 86 percent of the
currency in circulation, and the poorly-planned rollout in the middle of 2017
of a new goods-and-services tax. Exports are no longer declining, as they had
for several quarters; indeed, for the last month that data is available, they
rose 30 percent. The Purchasing Managers’ Index expanded the fastest it has in
five years. At least one international ratings agency has upgraded India’s
credit rating.
Most importantly, growth sped up last quarter for the first
time since early 2016. There’s every reason to think it’ll bounce back towards
the 7-7.5 percent range shortly.
Nothing is ever straightforward in India, however. Just as
growth appears to be no longer a pressing problem, another familiar threat has
reappeared: India’s macroeconomic numbers don’t look quite as stable as they
should.
The last few years have been something of an aberration for
India. This is a country that tends toward pretty high inflation -- which makes
sense, if you look at it from a political economy perspective. Given India’s
inefficient state, pumping up agricultural prices is pretty much the only
reliable way to transfer resources to millions of subsistence farmers. Over the
last few years, those price increases have slowed. Together with low demand and
the fall in oil prices between 2014 and 2017, that helped drive inflation below
the Reserve Bank of India’s target level of 4 percent.
Things now seem to be returning to normal. Crude oil prices
started inching back up last year, along with Indian inflation, which was, in
the last month for which data is available, 4.9 percent. The RBI seems
convinced it’s going higher still.
Meanwhile, even Narendra Modi can’t defy India’s political
economy forever. He’s under unaccustomed pressure following elections in his
stronghold, the western state of Gujarat, which went down to the wire -- a
photo finish blamed on growing economic distress in rural areas. Most Indian
politicians would respond with a giveaway or three; Modi’s predecessor,
Manmohan Singh, forgave a chunk of agricultural debt when he was up for
reelection in 2009. At the very least, the increases in administrated
agricultural prices are likely to get considerably less stingy.
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