Iraq to punch hole in Budget; Rupee movement will be key: ASSOCHAM

The paper, Sudden and Shocking twist from Iraq to Indian Economy has pointed out that a slew of policy announcements signaling commitments towards reforms

June 24, 2014 8:51 IST | India Infoline News Service

Turmoil in Iraq will punch a big hole in the finances of the Indian government forcing it to go in for further bitter medicine for the consumers of goods and services that would exert pressure on prices pushing the economy further into the vicious circle of high inflation and low growth, an ASSOCHAM paper said seeking all-out efforts to somehow keep rupee strong at this critical moment.

The paper, Sudden and Shocking twist from Iraq to Indian Economy has pointed out that a slew of policy announcements signaling commitments towards reforms can make a difference and sustain investor interest in the renewed India story that will sustain the Rupee strength.

Deficient Monsoon expected in Maharashtra, Madhya Pradesh, Punjab, Haryana, Rajasthan and Uttar Pradesh along with the Himalayan states would add to the woes of the Indian economy that had seen a glimmer of hope in terms of better governance with a decisive NDA Government of Prime Minister Narendra Modi taking charge. The Khariff sowing so far has been significantly less than last year raising prospects of pressure on prices of food products.

A good part is that despite some political statements, people are willing to give some time to the new government to implement innovative policies to take the economy out of stagnation so that jobs can be created and improvement in governance is seen at the ground level, the paper said.

However, it cautioned that with rising aspirations and a high level of expectations from the Narendra Modi government, the patience level will be on a real test once the full scale impact of the Iraq crisis is seen. With the Brent crude crossing USD 115 to a barrel, it is only a matter of time that the oil marketing companies will go in for revision of petrol prices while the government may be able to put up resistance for some more time as regards diesel prices are concerned. Then there are issues of cascading effect of rising costs of transport such as Railways.

Because of the Iraqi crisis, the government cannot afford any slip and needs to keep round the clock watch on the developments. Besides, out of the box strategies need to be devised with pro-active approach towards the Middle East which has emerged as one of the most crucial areas from geo-political and economic perspective. For one, we source bulk of our crude oil requirement from the region.

Second, the largest numbers of the forex earning Non-Resident Indians are based in the region. Thus, instead of waiting for the events to overwhelm us, we as a nation need to be pro-active along with other nations with similar interests, ASSOCHAM Secretary General Mr. D S Rawat said.

He said while the US has adopted a wait and watch policy, bigger economies like India, China and Japan must exert pressure on the American administration to take a global view of the events rather than focusing on interest of individual countries.

Besides, India must diversify its source of energy need and go in for massive policy changes making investment in exploration of gas and other hydro carbon as the most attractive in the world. Being heavily import dependent nation, we cannot afford populist policies as regards the entire hydro-carbon sector is concerned, the ASSOCHAM paper advocated.

It said even though things are turning against the rupee, quick policy announcements by the NDA Government ahead of the Budget can sustain interest of the global investors in the India story and the commitment of Prime Minister Mr Narendra Modi to go ahead of with reforms agenda even it means tough decisions.

The paper said, These decisions will keep the momentum in the market which in turn will keep rupee stable at 60-61 to a dollar. We certainly cannot afford a situation where the Brent crude is rising and the rupee is slipping. That will take the country back to a precarious situation as regards current account balance is concerned. Investor confidence has to be maintained, whatever it takes by the new Government. The ensuing Budget should be a bold statement in this direction, the ASSOCHAM assessment of the ground reality noted.

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