India could well experience the effects of an oil price shock if oil prices continue to rise

Political instability in the Middle East and ongoing payments crisis between Indian oil companies and Iran can lead to an oil price shock for India, says the Deloitte Global Economic Outlook report – Navigating the world of turmoil. While petrol has been fully deregulated and prices have been trending upward in the last few months, diesel prices remain artificially low in the country due to government subsidy. The trade-off is a challenging one: a high fiscal deficit versus higher inflation.

The report says that India and China are challenged by the impact of soaring food prices. Over the past few years, food prices have risen consistently. Much of the food inflation in India is said to have been caused by supply side bottleneck. After reaching a high in June 2008, prices of agricultural commodities fell and seemed to have stabilized. However, in the second half of 2010, food prices again began to rise sharply surpassing all records by year-end. Consumer confidence is already beginning to drop in several countries due to this.

On Foreign Direct Investments (FDI), the government is likely to announce further policy updates with a view to induce investments as the year rolls on. During the 11-month period from April 2010 to February 2011, FDI fell 25 per cent to $18.3 billion. Consequently, in the first week of April, the government scrapped a controversial rule that had prohibited foreign companies from setting up wholly owned subsidiaries without prior permission of the local partner if they were already operating together in that line of business.

India signed a comprehensive market opening pact with Japan in February. Over the next ten years, India and Japan will eliminate tariffs on 90 and 95 percent of goods recent developments in Japan notwithstanding, bilateral trade between the two countries could rise to US $25 billion by 2014. The India – EU free trade agreement (FTA) and the trade agreement with Thailand are also close to being finalized.

Besides India, the report covers economic developments in various geographies such as Japan, United States, United Kingdom, the BRIC economies, Middle East and North Africa.

Some of the key India specific highlights of the report are as follows: