Inflation is likely to remain at elevated levels, aggravated by rising fuel and food prices. Crude oil has touched a two month high and if there is a pass through of petrol prices, it could lead to fuelling inflation even further. Food inflation is likely to remain high in the next few quarters on account of the erratic monsoons.
Elevated inflation will mean high interest rates
Elevated levels of inflation in the economy would mean high levels of interest rates, as the RBI is unlikely to drop repo rates. RBI governor D Subbarao has been categorical on this count and has clearly re-iterated a hawkish monetary stance. He has already hinted that rates would not be reduced unless inflation in the economy reduces. If interest rates remain high, one can expect investments to slump and growth to remain subdued.
Household savings lowest in 22 years
Household savings have slumped to a 22 year low. According to preliminary estimates released by the RBI, the drop in net financial savings can be attributed to an absolute decline in small savings and lower growth in households' holdings of deposits, currency and life insurance funds, a report by Morgan Stanley pointed out. Lower savings means lower funds into the banking system and hence lower overall investments.
Fiscal deficit provides little room for stimulus
The government is staring at a fiscal deficit that might be close to 6% of GDP, with it's inability to control expenditure, particularly with regards to subsidies. This would mean that the government has very little room to provide stimulus, which would entail additional expenditure.
Stalled reforms would mean stalled investments and hence lower growth
For the economy to grow the nation would need huge investments. However, at every stage investments are facing a hurdle. Investments in the power sector would surely be affected by the ongoing coal scam, while other infrastructure projects are stuck by bureaucratic hurdles. High interest rates in the economy is forcing investors to re-visit mega projects. Government apathy is only adding to the investment misery. For example, the government is unable to push through reforms like the pension regulatory bill, GST, DTC and FDI in multi-brand retail, which would have added to fresh investments.
Clearly, those having any optimistic view on economic growth for the next few quarters, should re-visit their predictions. The nation must just hope and pray that we do not touch sub 5% growth rates again.