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Oil shock in winter of discontent

By DM Deshpande

President Trump is known to give shocks but this one, oil shock, couldn’t have come at a worse time for India. The economy is already teetering with five per cent GDP growth for two consecutive quarters. Till recently and for almost half a decade inflation rate has remained benign but now it has raised its ugly head touching five per cent mark.

This is mainly driven by prices of onion and pulses. Tax collections have been hit mainly due to the prolonged slow down the economy is going through. In a few weeks from now, the Finance Minister is due to present her budget 2021 in the Parliament. She was widely expected to announce tax cuts and concessions to kick start the economy. Now, this development adds another dimension to an already complicated task of macroeconomic management.

Global stock markets immediately reacted to escalation of tensions in the Middle East. Indian markets went down by a massive 1.9 per cent on the day American missiles hit Iran and killed their paramilitary forces General. As investors hurried for covers, gold prices shot up in world markets to a six year high. Not to be left behind, oil prices raced to US $70 per barrel. Indian dependency on imported oil has only increased over a period of time-from 83.3 per cent to 84.5 per cent in just one year. Oil import bill went up to $111.9 billion in 2018-19 from $87.8 billion in the previous year according to oil ministry’s Petroleum Planning and Cell (PPAC).

Oil prices will shoot up if hostilities do not stop in Middle East. By how much price of oil would rise is almost impossible to predict. Already oil prices are at 13 months high in the country. The US will only be better off as it is net exporter of oil; in addition, several American companies are engaged in oil exploration in the Gulf region. Besides shale oil industry of US which was under pressure would now heave a sigh of relief.  

Iran has retaliated in the only way it could have, by attacking the military base in Iraq and elsewhere. India is probably the only nation where Shia and Sunni Muslims live in some kind of harmony. The ISIS, Iraq and the Saudi are all Sunni dominated and hence are not expected to join forces with Iran to punish America. That may be a saving grace for Trump but with 2020 elections round the corner he is not keen on war that would inevitably involve lifting body bags of slain soldiers. Iran is known to calculate and take it’s avenge. It has already retaliated and claims to have killed Americans. Trump has, of course, has down played the attack and said ‘all is well, so far so good’. On its part, Iran has said that it has taken proper and ‘proportionate’ action.

Does this mean the hostilities would end? Not quite. Having made a bold move, Trump could think of rational measures. Iran is keen that the US should offer concession to nuclear deal which Washington has refrained from doing so far. This could bring an end to hostilities; but these are ‘rational calculations’ not entirely Trump’s forte! What about Iran? Going by the past record, it is also ambitious. It claimed, rightly or wrongly, that it brought about the defeat of American President Jimmy carter in 1990. So, it will not be a surprise if it decides to inflict wounds on Americans that would almost certainly ensure Trump’s defeat in hustings.  

India has limited options. One thing that it can do is to end the subsidy on kerosene. With universal supply of electricity, there is really no justification for continuation of this concession. Similarly, there is no need to go back on reforms already undertaken in oil sector. The prices of oil and its products should be allowed to go up in line with international prices. Temptation to hold on to a certain price at retail level by using administered prices should be avoided. It may push inflation rate higher but that will any way happen if the deficit grows.

Reviving and kick starting the economy has become difficult and challenging. The RBI per force,  may have to give up its cheap money policy. Government will not be in a position to offer tax cuts and concessions to revive demand and consumption. Investors and rating agencies will almost certainly re-rate risks in Indian economy. Growth, already low, will take further beating.

The best thing that can happen, under the circumstances, is Trump not winning the November Presidential elections. That, of course, is not in our hands.   

The author has four decades of experience in higher education teaching and research. He is the former first vice chancellor of ISBM University, Chhattisgarh.

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