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"While Import Duties Can Help At The Margin To Curb Imports, More Structural Solutions Are Required" Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities

With the Indian economy expected to grow beyond 7 per cent in FY2018, a lot of macroeconomic factors off late have proved to be challenging for India to sustain its current growth rate. However, the Government and RBI alike are taking all necessary steps to salvage the situation and set their home right to cushion the country against any national and international pressures. In an exclusive interview with Manali Jaggi of BW Businessworld, Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities talks about the ailing points crippling the Indian economy and the ways to address the concerns at hand.

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With crude oil hitting an all-time high, what limit do you peg the level to cross? Will it cross the $100 mark yet again as was last seen in 2009?

It is difficult to ascertain what levels the crude prices could reach up to. More importantly, directionally crude prices will see some upside in the near term. For FY2019 we are working with an average crude price assumption of US$80/bbl implying that price could remain above the US$80/bbl mark.

Is cutting the import duties on gold and other import items the panacea to balance the current account deficit and bring stability in rupee? 

Much of increase in non-oil imports have been led by items such as electronics (mostly mobile phones), coal, and jewellery (diamond, gold, etc.). Much of this demand is structural in nature and reflective of the demand growth in the economy. While import duties can help at the margin to curb imports, more structural solutions whereby reliance on imports decrease over long term are required. Otherwise, if demand growth continues to remain strong with easy access to finance, imports are unlikely to reduce in a sustainable manner. The stability of the Rupee depends on both domestic and global factors so the import curbs need to be seen in conjunction with other measures from the government and the RBI.

Finance Ministry is mulling a proposal to float a special gold deposit programme to cut imports of the metal by recycling it inside the country, will it bring the required result? Your comments? 

Most of the gold held by households is in the form of jewellery for a variety of reasons such as sentimental value, safety net for the future, etc. Jewellery demand rarely has any investment value (unlike other forms of saving/investment instruments) attached to it. This can make recycling of household-held gold (especially jewellery) difficult.

What kind of spiral effect will US-China trade war have on Indian corporates, economy, and markets? How do you expect this war to end?

The larger impact of the trade war will be seen if there is a global investment slowdown on the back of uncertainty on how the trade regimes change. In such a scenario, it is unlikely that India will remain immune as the relatively exports-dependent manufacturers will see some slowdown. Obviously, India will be relatively less affected than other export-dependent EMs, but the capital flows will be a bigger worry then. Riskier assets (such as the EM basket) are unlikely to be favoured and the Indian markets could see some headwinds from a more intense trade war. Further, a weaker currency will weigh on the economy. On the positive side, if global growth slows down, India could gain through some correction in commodity prices (mostly from crude). Overall, it will be negative for the Indian economy, though it could be in a better position relative to its peers. If supply chains are disrupted, it remains to be seen whether India can benefit given some of the structural issues with respect to manufacturing sector expansion.