Downward Trend in Gold and Oil Prices Supports India's Inflation Outlook

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The Indian economy is seeing a revival and is very likely to grow 6% in the current financial year. According to an ASSOCHAM Outlook Report, contributing improvements in the global economic environment include a normal monsoon season, which will have a positive spinoff for the important services sector; a bottoming out of the industrial expansion; and the U.S. recovery in exports. The report, prepared in the last fortnight, notes that there is a definite downward movement in the prices of gold and crude oil, which are key interests for India.

In the 2012-13 financial year, Indian growth fell to 5% from 6.6% the previous year. Factors cited as causing the drop include a drought; serious problems in global markets, which hit merchandise exports; and the high cost of borrowing, which also afftected the industrial output. On top of these negatives, there was a major gap between imports and exports, which created difficulties, particularly for government finances--the current account deficit reached an unsustainable level of 6.7% in the third quarter of the 2012-13 financial year.

The global economy, and to some extent the Indian economy, seems to be shifting to a cyclical track, which will work to the advantage of net importer countries like India, at least in the short run. The trade deficit in the current fiscal year is sure to be reduced to a much lower level from the $190 billion in the previous fiscal year. Exports are expected to gain further momentum in 2013-14, says the report.

Positive indications for foreign direct investment, such as a $10.5 billion proposal from IKEA, will do a lot of good for the Indian macro picture. With both gold and crude oil showing a steady downward bias, the pressure on inflation is bound to be reduced. Good rain that is expected this year also will check inflation, possibly making the Reserve Bank of India revisit its tight monetary stance.

ASOCHAM warns against the danger of serial corruption scandals; with a string of important state elections coming up, demand for political freebie handouts must be resisted.

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