Economic Outlook, Prospects, and Policy Challenges

Source: Central Statistics Office.

determined by their nature: a positive shock that

is perceived to be permanent should lead to larger
consumption increases because the countrys
permanent income has increased; on the other
hand, temporary positive shocks should lead to
greater savings. What has India done?
Given the uncertainty about the nature of the
shock, India has appropriately hedged. Figure 1.4
below compares the decline in international crudeoil prices with the corresponding decline in
domestic retail prices of petrol and diesel. Since
end-June 2014, the international price declined
by about 50 percent. Of this, about 17 percent
(representing about 34 percent of the overall
decline) was passed on to consumers while the
government retained the rest. In other words, 66
percent of the terms of trade shock went into the
governments savings with the rest being passed
on to consumers. (As detailed in section 1.12, the
governments actions in this regard are also helping
in form of a de-facto carbon tax.) Accounting for
uncertainty about the future movement of prices,
the macro-economic response has appropriately
balanced savings and consumption, and by
favouring the former, provided a necessary cushion
to absorb the effects of higher oil prices in the
future.

1.2B

OUTLOOK FOR GROWTH

In the short run, growth will receive a boost

from lower oil prices, from likely monetary
policy easing facilitated by lower inflation
and lower inflationary expectations, and
forecasts of a normal monsoon. Medium-term
prospects will be conditioned by the balance
sheet syndrome with Indian characteristics,
which has the potential to hold back rapid
increases in private sector investment.
In the coming year, real GDP growth at market
prices is estimated to be about 0.6-1.1 percentage
points higher vis-a-vis 2014-15. This increase is
warranted by four factors. First, the government
has undertaken a number of reforms and is planning
several more (Box 1.2). Their cumulative growth
impact will be positive.
A further impetus to growth will be provided by
declining oil prices and increasing monetary easing
facilitated by ongoing moderation in inflation.
Simulating the effects of tax cuts, declining oil prices
will add spending power to households, thereby
boosting consumption and growth. Oil is also a
significant input in production, and declining prices
will shore up profit margins and hence balance
sheets of the corporate sector. Declining input costs
are reflected in the wholesale price index which
moved to deflation territory in January 2015.