FY16 India outlook remains bright amidst global cross currentsFY16 India outlook remains bright amidst global cross currents

On the heels of World Bank, the International Monetary Fund (IMF) in its latest World Economic Outlook (WEO), has lowered its 2015 world growth forecast by 0.3% to 3.5%, citing expected weakness in investments and lower economic activity in China, Russia, Euro area and Japan to more than offset the benefit from lower oil prices.

The WEO update alludes to three key developments that will shape global outlook in 2015. ASSOCHAM assesses the impact of these global 'cross currents' on the Indian economy:

Decline in oil prices

IMF expects sizeable uncertainty about the oil price path in the future. The correction so far is positive, especially for advanced economies and oil importers, but could adversely impinge on growth in oil exporting economies

 

Impact: For India - a net oil importer, the close to 50% correction in global oil prices since their 2014 peak, has positive implications for subsidies and fiscal deficit, imports and trade deficit, along with inflationary pressures.

Divergence in global growth

While US is expected to grow at a faster clip, economic performance in all other major economies - Japan, Euro area in particular and EMEs of China and Russia is anticipated to wane in 2015 Further, growth estimate of world trade volume has been lowered by a sharp 1.1% to 3.8% for 2015, primarily led by EMEs and developing economy slowdown

Impact: For India, these trends on balance are likely to be neutral. With US accounting for 12% of India's annual exports, a boost to external demand from the region could completely offset weaker demand from rest of the world

Uncertainty in financial markets

One potential trigger for financial market volatility could be US monetary policy normalization amidst uneven global expansion

Impact: With improved macros and close to USD 320 bn of forex reserves to defend its currency, India is in a better position to withstand any financial market gyrations in FY16

With global environment turning favourable to place India at a 'sweet spot', the Indian Government must utilize this window of opportunity to quicken the pace of economic reforms. While the recent efforts to reform energy subsidies is laudable, continued efforts towards better targeting of subsidies, upping public expenditure on infrastructure to crowd-in private investments, and switching expenditure to improve quality of fiscal adjustment, along with policy boost to industrial activity are some of the actions we expect the FM to announce in the upcoming budget.

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