Insights into Editorial: Can India beat this slowdown?
17 February 2016
World oil prices are not likely to recover anytime soon, going by market conditions. A further increase in supply, compounding the current glut, and a parallel contraction in demand in the major consuming nations, are likely to keep prices low. The ongoing fall in prices stems largely from simple demand-supply mechanics.
- The price of crude oil remained mostly above $100 per barrel for almost three years from 2011 onwards, but declined sharply during the second half of 2014, settling at around $50 per barrel for a good part of 2015.
- Stock market prices collapsed in many parts of the world in January this year when oil prices fell to even greater depths, touching below $30.
- This has affected China’s growth too. China’s economy is projected to grow at 6.3% in 2016, its slowest growth in 25 years. A slowing China has far less appetite for oil and other commodities. This, in turn, has adversely affected a number of emerging economies, which are suppliers of commodities or are closely linked to the Chinese production networks.
- Due to this, Russia and Brazil, both major commodity-exporters, registered negative rates of growth of gross domestic product (GDP) in 2015.
Reasons for declining oil prices:
- The advance made over the last few years with respect to oil production, especially in the U.S.
- United States domestic production has nearly doubled over the last several years, pushing out oil imports that need to find another home.
- The recent lifting of sanctions against Iran has eased the supply situation even further.
- The falling oil prices are also a reflection of the stagnation in worldwide demand.
- In addition, Saudi Arabia is moving strongly to increase refinery capacity, which will further add to global supplies. This comes on top of OPEC output in July 2015 hitting its highest levels in recent history.
- On the demand side, the increased supply has been met by recessionary or slow-growth conditions in most industrialised countries, which have greatly moderated their consumption since the economic crisis. Vehicles in these countries are also becoming more energy efficient.
What’s good news?
What is surprising is, amid such global crisis, India’s economy appears to stand tall. Its projected growth for 2015-16, at 7.3%, makes it the fastest-growing large economy in the world, according to the International Monetary Fund (IMF).
- India is a large importer of oil, and therefore falling oil prices have been beneficial to its economic growth.
- India’s oil imports as a proportion of its GDP have come down from around 9% during 2011-14 to less than 5% now.
- With the fall in oil prices, inflation based on the wholesale price index (WPI) has been in the negative territory in the country since November 2014.
What’s bad news?
Few experts argue that the picture of growth and stability presented by the above-quoted figures is misleading. Why?
- To begin with, it is important to note that few scholars have already raised questions on the recent GDP growth figures, which are based on a new methodology employed by the country’s statistical agencies in estimating national income.
- Also growth across various sectors in the country is not uniform. Monsoons have been deficient in the country for the second consecutive year, with a disastrous impact on agricultural production and rural demand.
- The performance of the manufacturing sector has been unimpressive. Micro- and small-industrial units in particular have been facing a crisis over the last several years.
- Year-on-year growth of India’s exports has been negative for 12 consecutive months in a row. There has been a surge in manufactured imports into India in recent years. Imports from China have increased markedly following the slowdown in that country’s economy.
- It is only due to the high rates of growth in the services sector that India’s overall economic growth appears robust.
- Given its nature as described above, it is not surprising that India’s economic growth has had a poor record with respect to employment generation.
The boom years of the Indian economy were between 2003-04 and 2010-11, when its GDP grew at an average annual rate of over 8%. Private investment and exports were important drivers of growth during the first part of this high-growth phase, which lasted until 2007-08.
- But export growth nosedived in 2008, and has never really gained momentum ever since, with the global economy moving from one crisis to another.
- Despite this, India’s fast growth continued, thanks to the stimulus measures launched by the authorities, which led to an impressive pickup in consumer demand, especially for automobiles and housing.
- However, India’s domestic private investors have got cold feet since 2011-12. The reasons for this include the sagging demand conditions at home and abroad, and the unutilised capacities they had built during the previous years. Many of them are also heavily indebted.
- Private consumption expenditure accounts for the largest share of aggregate demand in India. But it cannot be an independent driver of growth for the economy.
- Further, consumer demand in India is not mass-based — with bulk of the expenditures coming from a small category of the rich — and therefore not beneficial for industries that want to gain from economies of scale.
What can be done?
In the current circumstances, it seems that the only engine of demand that can pull the Indian economy forward is government expenditure.
- No one disputes that India has huge investment needs in irrigation, electricity, rural and urban infrastructure, as well as in many areas of basic research. But these are all long-gestation projects, offering little immediate gains to any investor.
- Naturally, private investors have been wary about putting their money in them. These are precisely the areas where the government should step in, raising public investments to remove some of the long-standing constraints to growth and development.
- The advantages offered by low oil prices by reducing inflation and external payments create an opportune environment for India to increase public investment in the country.
- The Finance Ministry’s Mid-Year Review released in December 2015 too stresses on the need to raise public expenditures in India in the current context.
The world economy is likely to see more turbulent days ahead. If foreign investors and foreign markets are going to be staggered in these uncertain times, India will have little to gain by going after them. Instead, the country’s policymakers should turn their attention inward, devising strategies to unleash domestic markets and entrepreneurship in this large and diverse nation.