The Telegraph
Since 1st March, 1999
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North Block feels the strain of Iraq tension

New Delhi, Sept. 16: With the West Asian cauldron threatening to blow up into a major conflagration at any time, India is concerned that its economy may take a beating from the crisis.

The department of economic affairs is worried about the possibility of another rise in oil prices. It strongly believes that oil prices are likely to soar from the current $ 29 a barrel despite the petroleum ministry’s assertions to the contrary.

Besides its own internal analysis of the situation it has also received a worrying report on the likely scenario from the government’s think tank —the Institute of Economic Growth.

The IEG in fact revised its export growth forecast, bringing it down from double digit figures to an average of 6.6 per cent for the next quarter. Exports in fact grew at a steady 11.29 per cent in August this year.

All this is expected to severely affect the country’s trade balance and forex reserves situation, besides leading to further depreciation of the rupee. The Reserve Bank has already been sounded out on the possibility of intervening in the forex market, but officials feel that with the world-wide fall in currencies, the intervention’s impact may well be limited.

“Expected depreciation of the rupee and gloomy market sentiments may keep imports depressed in the coming month. But expected increase in world oil prices might increase the oil import bill,” the IEG report said.

In fact, non-oil imports are expected to remain in the dumps, recording a negative 0.8 per cent over the next three months.

Exports are likely to be hit by the gloomy performance of the US economy, appreciation in the exchange rate and an expected increase in inflation.

Ministry officials said despite the current positive FII sentiments, war fears may see a constriction in investment, which, in turn, could weaken the sensex further.

The industrial growth rate too is expected to remain sluggish, with growth in the range of 4-4.4 per cent over the next three months. This recessionary trend is expected to accelerate and hit a negative 6 per cent.

Inflation is also expected to rise and inch towards the 6 per cent mark. The main reason for the cost of living going up, feel ministry economists will be the higher price of oil, power, fruits and vegetables.

To try curb inflationary trends, the government is likely to allow entry of larger volumes of cheap goods from abroad as well as resort to open market sales of food. These measures are expected to dampen price rise, but economists fear that with the rupee depreciating further and cost of industrial production rising steeply, the country may well have to contend with stagflation.

“The resultant outcome could be stagflationary like that which used to occur after the oil shock of the 1970s,” predicted a ministry official.

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