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[op-ed snap] The economic challenges of 2018

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Basic terms of the Economics like fiscal deficit, current account deficit, etc.

Mains level: The newscard talks about the upcoming challenges(primarily due to rising oil prices) of the Indian Economy in 2018.


News

Economic conditions have begun to shift

  1. Global crude oil prices have climbed to around $70 a barrel
  2. This is higher than what most Indian policy makers seem to have assumed in their models
  3. Economic growth has recovered from the depths it plunged to after the demonetisation shock
  4. Consumer price inflation has been climbing every month since it touched a low in June, and the latest number is close to the higher end of the acceptable range
  5. The trade deficit is also widening, with oil being the most important contributor but other factors such as higher imports of gold and consumer electronics also playing a part

Is all this a cause for worry?

  1. The economic stability that has been achieved in mid-2013 does not seem to be at risk—for now
  2. But untangling the effects of higher global oil prices on Indian economic growth is not an easy task
  3. There are two research papers that are worth highlighting here
    FIRST
  4. A working paper was published by the IMF in 2016, The Differential Effects Of Oil Demand And Supply Shocks On The Global Economy
  5. It shows that a lot depends on whether movements(up and down) in global oil prices are dominated by changes in demand or changes in supply
  6. A surge in oil prices driven by supply constraints typically hurts economic activity over a long period of time
  7. The impact is quite different in case the increase in oil prices is primarily because of higher demand
  8. In other words, a lot depends on whether the current increase in global oil prices is being driven by higher demand or lower supply
    (though the shale revolution makes the former a more likely candidate)
    SECOND
  9. Harvard University economist Gita Gopinath showed in a 2007 paper that emerging markets such as India have more volatile economic growth than the developed economies

Indian economy is out of danger

  1. India is nowhere near the dangerous place it was in 2013, in terms of the standard indicators of economic stability such as the fiscal deficit, the current account deficit and consumer inflation
  2. Yet, the year ahead is likely to see some deterioration in public finances, a larger current account deficit that needs to be funded with capital inflows and higher inflation as the output gap closes
  3. Indian macroeconomic policy always gets complicated when global oil prices increase steeply
    (as expected soon)

The way forward

  1. The economy in 2018 looks very different from the one in 2017
  2. And all this at a time when potential growth could have slipped to as low as 6.7%, as credit rating agency Fitch recently estimated
  3. In other words, the Indian economy could begin to heat up quickly—with higher inflation and a bigger trade deficit as the main signals
  4. Unless private sector investment picks up soon to increase productive capacity
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