India claims top spot for 2018 growth, but here is a reason that may hurt it

Economic growth in India: The country will claim the top spot among the world`s fastest-growing major economies this year, but rising trade tensions between the United States and China may restrain that growth, a Reuters poll of economists showed. The recent tit-for-tat import tariffs imposed by the U.S. and China have raised concerns about a full-fledged global trade war which could throw an otherwise-strong world economy off-course.

Twenty of 29 economists who answered an extra question said India`s economy will be hurt by the ongoing trade dispute. "India runs the risk of being caught in the middle of the trade spat between the U.S. and China," said Hugo Erken, senior economist at Rabobank. Erken said growth will take a hit if India takes sides as the side not chosen may retaliate by imposing duties. 

"The damage would especially be large if India retaliated with an import duty on either U.S. or Chinese imports," said Erken, adding that such a scenario was unlikely. However, not all economists shared that view. Nine respondents said India`s economy would benefit from the dispute.

"Though in the short-term a trade war between U.S. and China may impact global trade including India, in the long-term, India is likely to benefit as China will be forced to devaluate its currency to remain a dominant player in the world market," wrote RK Gupta, managing director at Taurus Asset Management. "In that scenario, India`s exports will be more competitive with China."

The latest poll, taken April 11-18, predicted India`s economy will expand 7.4 percent in the fiscal year that began this month. That is in line with the International Monetary Fund`s projection, and is a slight upgrade from the January poll.

For the next fiscal year, growth is expected to average 7.5 percent, a touch lower than the IMF`s forecast of 7.8 percent. After growth slowed sharply for much of last year, India regained its status as the world`s fastest-growing major economy in the quarter ending December 2017.

The slowdown was mainly driven by the government`s sudden decision in November 2016 to scrap high-value currency notes and a botched implementation of a goods and services tax (GST) in July last year. But the impact of those moves has now faded. "The investment cycle is recovering, and there is steady improvement in consumption," noted Sonal Verma and Aurodeep Nandi at Nomura.

INFLATION TO PUSH HIGHER

While India`s retail inflation has eased this year and hit a five-month low in March, it remained above the Reserve Bank of India`s medium-term target of 4 percent.
But increased government spending ahead of national elections next year is yet to kick in and that is expected to be inflationary.

Inflation is forecast to average 4.7 percent in the fiscal year ending next March, and 4.9 percent the following year, the poll showed.

The state-run India Meteorological Department has forecast a normal monsoon in 2018 - a boon for the farm sector that accounts for about 15 percent of India`s $2 trillion economy and employs more than half its 1.3 billion people.

A normal monsoon would boost grain production and keep a lid on food price inflation, which tends to be volatile, but especially in India.

The Reserve Bank of India has kept interest rates steady after a 25 basis-point cut to the repo rate in August last year. It is forecast to keep rates on hold until the second half of next year, according to the poll of almost 50 economists.

Watch this Zee Business video on trade war

But economists have shifted their expectation for a repo rate hike to the quarter ending September next year from a move in the first three months of 2019.