A reprieve for the Indian economy

Will the global as well as the domestic data out last week be a game changer for the Indian economy? The problem facing the economy in recent years has been slow growth, together with high inflation. The recent fall in commodity prices, however, has revived hopes of a rapid fall in inflation.

High inflation has been hurting the economy in a number of ways. It has prevented the central bank from easing monetary policy more rapidly. High crude oil prices have bloated the fuel subsidy bill and the fiscal and current account deficits. High gold prices likewise have inflated the current account deficit. It has also been widely conjectured that high inflation has led to investment in gold rather than in bank deposits, which has squeezed bank liquidity and held them back from passing on the central bank’s rate cuts. Higher inflation has also led to lower savings. It has squeezed the margins of businesses. High domestic prices have hurt the competitiveness of exports. In short, lower inflation will bring many benefits.

But is the fall in commodity prices sustainable? The International Monetary Fund, or IMF, certainly believes so. It expects its crude oil price index to fall from an average of 196.8 in 2012 to 192.3 in 2013. Its price index of Australian thermal coal is expected to go down from 202.4 last year to 186.2. The price index for Malaysia palm oil futures is expected to decline from 255.6 last year to 214.9 this year. The International Energy Agency, too, talks of a softening in crude oil prices this year, thanks to higher supply from non-Opec (Organization of the Petroleum Exporting Countries) producers. The shale gas revolution in the US will continue to put pressure on fuel prices. Metals prices are dependent on the 
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pgdm 2nd sem