3 economic challenges that could cripple Modi govt ahead of Lok Sabha polls

India entered the new financial year on Sunday, 1 April. By this time next year, the country would be witnessing a high-pitch election campaign for the next general elections (unless there the government goes for early polls).

This means that for the incumbent Modi government, less than a year is left to control the economy which road bumps in 2016 and 2017 due to demonetisation and Goods and Services Tax.

But three economic factors are likely to make it difficult for the government to ease the economic hardship that the people have undergone since the announcement of demonetisation. Here are those factors.

Petrol and diesel prices

1) Petrol and Diesel prices have touched a four-year high in the country due to rise in the international price of crude oil. On Monday, people in Delhi paid a price of Rs 73.83 for a litre of petrol, while in Mumbai the commodity was dearer at Rs 81.69 a litre. Crude oil prices are up by 47% since 1 July last year, and have are increased India's oil import bill by for 2017-18 by $18 billion to $88 billion. For 2018-19, even if the crude oil prices remain at the same level, the full year import bill is likely to cross $100 billion.

Therefore, it would be a double whammy for the government, as higher petrol and diesel prices in the country would fuel inflation and the anger of the middle class. On the other hand, expensive crude purchase from the international markets will increase the current account deficit for the government.

Farm distress

2) Farm distress - Farm distress is not new in the country. But over the past four years, this community-usually divided on caste lines- has come together strongly to demand higher prices for their crops. The Centre had promised doubling of farm incomes between 2017 and 2022, but, surprisingly, in many states farmers are complaining of not even getting the minimum support price from the government.

While many state government announced farm loan waivers in 2017, its impact has been limited due to crash in the prices of various crops.

According to a ground survey conducted by Swaraj Abhiyan, farmers stand to lose around Rs 14,500 crore this rabi season due to crash in market prices of major crops, excluding wheat and rice. According to the report, the price of crops like gram, mustard, masoor, rabi and barley have dropped below the Minimum Support Price in most parts of the country.

Ramandeep Singh Mann, an agriculture activist, says that “The anger of farmers is building up across the country and may burst like a volcano anytime, if corrective measures are not taken”. But given the poor fiscal situation of the government and refusal of state governments to take the whole burden of easing farm distress, it is unlikely the government would be able to do much in the remaining part of its tenure for the farmers.

International trade war

American president recently launched a trade war against China by announcing high import duties on various products. Trump administration's also decided to to launch a trade challenge to most of India’s export subsidy programs at the World Trade Organisation. India on its part will try to present its case in the WTO, but experts believe for India it would be difficult to safeguard its subsidy based programmes that support exporters- especially in the textiles sector.

This sector is the second highest employment provider after agriculture in the Indian economy. One can easily gauge the troubles that the Modi government has at hand in terms of employment as well as foreign exchange. Though, the final decision on the issue will take something between six and nine months, a negative outcome for India would be a major shock for the government just before the elections.