Runaway oil prices to test Modi government in 5th year: Crisil

Mumbai: The Narendra Modi government has been lucky on the monsoons and oil front in the first four years, but external sector risks will be testing it in the crucial fifth year, according to ratings agency Crisil.

“Government’s efforts to ensure a well-oiled economy could be tested in its fifth year in office as multiple risks materialise, led by exogenous factors such as a runaway rise in global crude oil prices,” it said in a report today.

The gross domestic product grew 7.3 percent in the last four years, which is slower than the 7.6 percent average clocked in the previous decade under the UPA regime, but there has been “visible improvement” on other macro indicators, Crisil’s chief economist Dharmakirti Joshi said.

A raft of reforms and repair, disruptions, and slowing growth has also dominated the first four years. The government has pursued a “prudent policy stance” and there have been improvements in key macro indicators, the report by the research wing of the ratings agency said.

The fiscal and current account deficits (CAD) have also improved in the last few years, but there have been some reverses in the last year.

Even though price rise has broadly been under check due to factors like good monsoons and low crude prices, the present scenario of a rise in crude could be a testing one.

“A runaway rise in oil prices could stir the inflation scourge back to life and impact other macro indicators too,” it said.

Every USD 10 increase in crude prices will widen the fiscal deficit by 0.08 percent and the CAD by 0.40 percent, it said, adding that the ongoing depreciation in the rupee will only aggravate troubles.

The report said the reverses on the external front come even as rural distress is “mounting” and the business sentiment needle has not moved in a “material way despite better global competitiveness and ease of doing business rankings”.

Despite the government measures, the rural sector is impacted by slower agricultural growth, poor farm price realisation, slowdown in construction activity, and sluggish rural wage growth, it said.