Expert Zone

Straight from the Specialists

How falling crude prices affect India

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Brent crude prices have dropped below $100 a barrel, causing anxiety within the Organization of the Petroleum Exporting Countries (OPEC) and giving some relief to India and China. The market is bearish at present but the future is unpredictable.

A gas pump is seen hanging from the ceiling at a petrol station in Seoul June 27, 2011. REUTERS/Jo Yong-Hak/Files The fall in prices is largely due to subdued demand by consumers and oversupply by some OPEC producers. An added reason is the increase in U.S. production from shale. The next OPEC meeting to review oil supplies is in November but an early decision on quotas cannot be ruled out.

Oil is critical for India. For one, India imports more than two- thirds of its requirement, which constitutes 37 percent of total imports. A one-dollar fall in the price of oil saves the country about 40 billion rupees. That has a three-fold effect spread across the economy.

Where the growth in Q1 came from

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GA man walks his cow under high-tension power lines leading from a Tata Power sub station in Mumbai's suburbs February 10, 2013. REUTERS/Vivek Prakash/FilesDP growth of 5.7 percent in the April-June quarter was unexpected in view of the southward drift of India’s economy over the past two years. No wonder it pepped up the Bharatiya Janata Party-led government at a time when the ruling coalition is listing its achievements after 100 days in office. The question is where this growth came from and whether it will be sustained in future.

India’s economy has been slowing after achieving 9 percent growth three years ago. That was because the Congress-led government failed to fuel the economy. The absence of policy reforms, paralytic governance – combined with persistent inflation – discouraged investment. Growth tapered to 4.7 percent last year.

Why inflation is so persistent

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Inflation has been high for nearly four years and has not responded to the policies of the Reserve Bank of India or the central government. This is because the kind of inflation that we have is of an unusual variety and cannot be checked by conventional means.

It is important to look at the numbers. In July, the consumer price index (CPI) was up 8 percent and threatens to crawl up further after a deficient monsoon. That’s because 68 percent of the increase in CPI comes from food.

How high will the Sensex go?

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A bronze bull sculpture is seen as an employee walks out of the Bombay Stock Exchange building in MumbaiSince April, the stock market has been in a frenzy after a long period of utter gloom. In quick succession, the Sensex jumped month after month to cross 26,000 on July 7. This was not mere euphoria created by the election of the Narendra Modi government, with a single-party majority in the Lok Sabha after a long time.

Budget 2014 is only the first step

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Much was expected from Budget 2014/15 without realizing that India’s economy has its own rhythm, which changes only by small degrees if left to itself. That is why big-ticket reforms are necessary to quicken the pace. Finance Minister Arun Jaitley had reason to move forward with caution and make changes only at the fringes.

Labourers work at the construction site of a multi-level parking in ChandigarhNo wonder then that P. Chidambaram almost welcomed the budget as if it was a carryover from his own budget. Even the increase in shareholding by foreign investors in the insurance and defence sector, which Jaitley has announced, had been on the previous government’s agenda. Now that the opposition has shrunk, the Modi government took the first opportunity to do that, though with conditions.

Higher tax revenue from higher growth

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The 2013-14 budget got completely out of hand because of a whopping shortfall in tax revenue. Development outlays had to be drastically cut to manage the fiscal deficit.

The key to the budget is revenue. The ratio of gross tax revenue to GDP reached a high of 11.9 percent when GDP growth was at its peak of more than 9 percent in 2007-08. Since then, both declined and the ratio has been in the narrow range of 10-10.7 percent. GDP growth is a painless way of raising revenue.

The rupee at a crossroads

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The rupee was tossed around quite a bit in the last 10 months. It dropped to a low of nearly 69 to the dollar, creating an economic crisis, before it recovered and is now at 59-60. The threat is not that it may drop once again, but that it may appreciate further and upset the economy in other ways.

Why would the rupee appreciate? Because there are expectations the Narendra Modi government will facilitate development and enable the economy to get back on course. This is what drove the Sensex beyond 25,000. But the currency market was more stable in spite of the huge inflow of $2.2 billion in 10 trading days of May.

How much inflation is good for growth

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The RBI has left it to the government to decide the inflation target since it considers it politically sensitive. The central bank will accordingly modulate its monetary policy to ensure that the government’s target is not exceeded.

Targeting inflation alone cannot be the sole objective of monetary policy, though it is an important criterion for regulating the repo rate. Even developed countries have concerns about inflation – when it is too low or too high.

Tough to get the math right in 2014/15 interim budget

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Finance Minister P. Chidambaram went more by economic considerations than political ones in manoeuvring his pre-election budget, the focus being on fiscal consolidation with an eye on rating agencies.

The 2014/15 interim budget did not have any new populist measures. The minister may have been convinced that such gimmicks just before elections do not yield votes. Also, there was hardly any time to effectively roll out a new scheme.

Slow pick-up in India’s GDP growth

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GDP estimates by the Central Statistics Office for the 2013-14 fiscal year show an improvement over the previous year. But the extent of improvement is too small for comfort. Possibly, in the final revision, that small margin may disappear or even turn negative.

This year, India’s GDP is expected to be up 4.9 percent from 4.5 percent the previous year. This additional growth has come mainly from agriculture, due to a favourable monsoon. Agricultural growth was three times the previous year. Production of non-food grains (like vegetables and fruits), and animal products (like meat and eggs), did not increase adequately in spite of the inflated demand and will continue to be the main source of inflation.

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