Headwinds Build Up For The Economy

The continued rise in oil prices and a crisis of confidence set off by the IL&FS episode pose a challenge.

- Raghuvir Srinivasan

Three weeks is a long time for the economy. Ask Finance Minister Arun Jaitley and the mandarins in North Block. Until recently, it seemed as if growth was finally returning and that the petulant rupee was the only problem to handle. Not any longer, though.

The last few days have seen a crisis break out in the debt markets in the form of the IL&FS defaults that is threatening to spread to other parts of the economy and rudely snuff out the nascent growth impulse, if it is not handled with care. Alongside, global oil prices have been staging an incessant upward march, causing fresh headaches for the Centre. With the Reserve Bank of India all set to raise rates later this week in its monetary policy announcement, the cup of woes is filling up fast indeed.

Let’s take oil prices first. Petrol prices have breached the 90-­a-­litre level in many parts of the country in the last few days, with diesel prices not too far behind. With the Organisation of Petroleum Exporting Countries (OPEC) ignoring calls to increase output, global oil prices, that are hovering around $82 a barrel now, could well touch the $100­abarrel mark as the November 4 date for sanctions on Iran nears.

As domestic prices of petrol and diesel too race towards the three-figure mark, there is bound to be tremendous pressure on the Centre to cut taxes to reduce prices. The question is: can it? The choice is really between a rock and a hard place.

Should Centre cut duty?