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Global economic volatility: India impact

 

The last few months have been a rollercoaster ride for global markets, especially in the context of crude oil. Rising geopolitical tensions have also made the markets quite sensitive, and have hit emerging economies adversely. In this article, we explore the reasons why.

 

Dr Suresh Srinivasan

The last few months have been witness to enormous volatility in the global scenario, both in terms of geopolitics and economics. Sensex, the benchmark Indian stock market index, recently fell sharply by around 800 points, recording the biggest weekly fall in more than two years. Given the global uncertainties, especially with respect to the international relations in US, Iran and China, more such declines are being talked about. The Indian rupee has moved from `65 to a US dollar to `74 to a US dollar in the last six months — close to a 14% depreciation over the last six months.
The Indian stock market’s fall was not isolated; it was in response to a global meltdown in some form. Asian markets as a whole recorded a sharp fall in alignment with the US equities, which also did see a slide. A number of global factors drove such a fall — uncertainties in the form of rising US interest rates and the potential impact of such a scenario on emerging market funds was a major concern. Liquidity around the world is becoming tight, and asset bubbles are being spotted. The US-China trade tension is spilling a major uncertainty.

Rupee, crude and deficit
The global crude oil price has moved sharply from `52 a barrel to `78 a barrel in just six months. This is a straight 50% increase, and has thrown many crude-intensive industries in peril. As India imports more than 75% of its crude oil requirements, such an increase will, and has already started to, sharply hurt our import-export balance and drive the current account deficit to higher levels.
Fuel prices at petrol pumps and gas stations have become a nightmare to the current government, the last thing any ruling government would want to happen in an election year! High petrol prices hovering around `87 per litre and diesel prices at an all-time high have hit the common man straight. Last month, petrol breached the `90 mark, and cooking gas LPG too went past the `500 mark level for the first time ever. The rising fuel price has also become a handy tool in the hands of the Opposition.
Although the government has offered relief in terms of excise duty cuts and thereby reduce the price of fuel at the pumps, the drop in price has been marginal and by no means large enough to lift the low morale of the common man. A part of the price cut has been passed on to the oil marketing companies like Hindustan Petroleum and Bharath Petroleum, which has caused their shares to sharply fall in the stock markets.
The crude oil-intensive airline industry, for example, is showing large cracks, especially with companies like Jet Airways in a very serious financial condition. Not only airlines, the impact of crude oil increase spills over to virtually all industries and most of the goods and services, in the form of higher ‘input’ costs and expanded cost of incoming logistics and transportation; in turn having a larger impact on manufacturing intensive industries.
From one point of view, such increase in costs of goods and services will have an impact on inflation, which the Reserve Bank of India (RBI) is keeping a close watch on. In the recently concluded monetary policy review, the RBI kept key rates unchanged for the time being. but the committee warned that the global headwinds in the form of escalating trade tensions, volatile and rising oil prices, and tightening of global financial conditions pose substantial risks to the growth and inflation outlook.
The RBI has revised the Consumer Price Index (CPI) based inflation projections to 3.7% in the second quarter of 2018-19, 3.8% to-4.5% over the subsequent two quarters and at 4.8% in the first quarter of 2019-20 ending in June 2019.

Geopolitics
With crude prices hovering at a four-year high, there are already justifiable propositions that predict prices as high as $100 a barrel in coming days, and the prevailing global uncertainties are many and varied. Political uncertainties and disruptions in large oil-producing states like Venezuela, Iraq and Libya is causing short term supply side glitches.
Strong economic growth in China and India, as well as the approaching winter in the US and Europe, is spiking the demand for oil. All of these are driving a big increase in the global oil demand. In addition to these demand side issues, the supply could be impacted due to the geopolitics of tensions between the US and Saudi Arabia as well as the US sanctions against Iran.

Iran, Saudi Arabia & US
US energy sanctions against Iran will be effective from the first week of November. All countries procuring crude oil from Iran will have 30 days to wind down their off-take from Iran and identify alternative sources of procuring crude. This is considered to be harsh, as it is extremely difficult to get purchasing sources in such a short span of time. India, for example, has been purchasing a large proportion of its crude requirements from Iran for ages and at terms that are most favourable, including the fact that the payment currency is not designated in US$.
Global politics has been further muddied with the recent assassination of Saudi Arabia’s Jamal Khashoggi. The liberalisation initiatives undertaken by Saudi’s Crown Prince Mohammed bin Salman and his initiatives in opening up the Saudi economy have triggered many issues. His ‘iron fist’ rule challenged and opened up many ‘no go’ traditions, like allowing women to drive, opening up the kingdom for cinema and international films and theatrical exhibitions after 35 years.
However, Prince Salman’s rash jailing of many political enemies and prominent figures has had its own backlash, and has faced substantial criticisms from the international press, especially from the West. Khashoggi, who writes for The Washington Post, was a critic of Prince Salman, and was recently killed inside the Saudi consulate in Istanbul, Turkey, opening up a conflict between the US and Saudi. This is a concern for the global oil situation, since Saudi Arabia is the largest producer of crude oil.
The US economy is also in poor shape as a result of President Donald Trump’s large scale tax cuts, and the deficits are likely to widen. Furthermore, the US Federal Reserve’s decision to increase interest rates has put emerging markets under stress.

Impact on India
Over the last month, the Indian government and the Reserve Bank of India (RBI) have taken a number of steps to minimise the adverse impact of such geopolitics on the Indian economy. These include stabilising the Indian rupee, easing rules on foreign borrowings, issuing of masala bonds to stabilise the rupee and reducing the current account deficit (CAD). High crude price will push the CAD to 2.6% of the GDP, as against 1.9% seen last year. India has also raised import duty on a range of items that could bring in more than `80,000 crore, thereby reducing the CAD.
Although this government benefitted from low crude oil prices for most of its term, which helped them launch several welfare schemes, the geopolitics situation in the last year of its term has turned out to be gruelling. A recent default by the major infrastructure financier ILFS is also a clear indicator that the liquidity crisis in the market is widening. All of these are very serious developments for the current government and the politics associated with it!