Tuesday, December 23, 2014

Oil Magic

Many say that it is not Modi magic which has saved the Indian economy from going Europe’s way but rather oil magic. Prices of India’s biggest import item – crude oil – fell by some 46 per cent from a peak of $ 107 in June to less than $ 57 a barrel by last week of December.

India's oil import bill for the last financial year stood at $150 billion. A $ 30-40 billion cut in that huge bill translates into that large a stimulus for the Indian economy. A rough back of the envelope calculation says that every $ 25 cut in crude prices translates into a $ 10 billion stimulus for the Indian economy.

The impact is visible -  the rupee value is far more stable, the fiscal deficit despite being worrying is more manageable because the Government spends that much less on fuel subsidies and has more money to spend on infrastructure. Finance Ministry economists estimate that instead of last year’s Rs 140,000 crore oil subsidy bill, the actual bill this year is likely to be nearer Rs 80,000 crore.

Banks have more money to lend as Government borrows less to pay for its oil bill (estimates are that the Government borrowed $ 39.25 billion less in the first half of this year than what it had planned to), which translates into more lending and more consumer demand.

Indian consumers too benefit, as prices linked to fuel – energy, food and vegetables – either fall or at least remain stable. Less spending on petrol  and diesel to run busses, trucks, cars or two wheelers also means that much more money in hand with ordinary citizens for other necessities.

Of course, the full impact of the drop in crude prices has not been passed on by the Government. A two-step rise in excise duty has ensured that the Government will mop up an extra Rs 40,000 crore in taxes and deny consumers that much money in hand. However, the Government has been beset by falling revenue collections and its excuse that this was the only way it could balance its books, seems to have been accepted by a wary citizenry.

This move to `balance books' of course is a leaf taken out of the thinking from the old `Command and Control’ economy which the Narendra Modi Government says it intends to do away with. True adherence to market economics would have meant passing on the drop in oil prices in full, to consumers and giving them the right to give the market a stimulus through increased consumer spending. But then, like all other things Indian, to expect us to make the leap from a `planned economy’ to a market economy with one change in Government is to expect too much. Change here really means change with  continuity ! 

The obvious question rising from all this is how did this change in our fortunes  happen? Crude prices are really down because of discoveries of shale oil in the US and Canada. There has been an increase of 1 million barrels per day of oil available in the market for each of the last three years because of the US shale revolution. Not only has more oil has come into the market, but the US, traditionally the largest importer of crude, no longer needs Saudi oil to fuel its engines !

The Saudi Arabia-led OPEC (Organisation of the Petroleum Exporting Countries) has traditionally tried to hold prices by cutting supplies. However, this time around, fears that US and Canada, will not cut oil supplies to the global market and muscle into their traditional markets stayed their hand. Possibly the fact that the oil countries which have traditionally used their oil wealth to build infrastructure and subsidise citizens’ lives are under greater pressure to continue to do so to keep them loyal in the face of a fundamentalist Islamic  revival in Arab lands which threatens the oil monarchies.

In fact conspiracy theorists claim that the US is intentionally driving down prices to beggar enemies and frenemies (friends who are really its rivals) ! Kuwait, Qatar and the United Arab Emirates can break-even on their budgets with oil priced at about $70 a barrel. Whereas, Iran needs a price of $136, Venezuela and Nigeria - $120 and Russia - a price of  $101 – making these economies vulnerable whenever the crude price plunges.

Postscript: Is oil below $ 60 the end of the story? Experts expect the fall to continue to sub-$50 levels and that to help economies like India and the US become productive and healthier. `Maybe `acche din’ may not be too far now !

Thursday, December 11, 2014

Mumbai Home For `A Girls Best Friend'

Diamonds - they say - is a Girl's best friend

Egged on by a Russia smarting under European sanctions, India wants to leverage long term buys of rough diamonds worth billions of dollars from the world’s biggest diamond miners -  Alrosa of Russia – to help turn Mumbai into a rival diamond trading hub to Belgium’s Antwerp.
Prime Minister Narendra Modi has announced that his government has decided to create a special notified zone, to which mining companies can import rough diamonds on a consignment basis and re-export unsold ones. The move, Indian diamtaires said could help turn India's financial capital into Asia's diamond trading bourse.
The Modi announcement came at a joint innauguration of a world diamond conference here with Russian president Vladimir Putin, whose Government owns 44 per cent stake in Alrosa, the mining giant which accounts for 30 per cent of the world’s annual yield of rough diamonds. About half  of its output is now sold to India through diamond bourses in Antwerp and Dubai, a fact which both Russia and India want to change by doing business directly.
“We get better margins and have stabler production regimes  if we can get into long term purchase agreements with Indian diamantaires… we used to have three such deals 4 years back, now this year we are increasing it to 12,” said Andrey Polyakov, vice president of the $ 5 billion mining giant which has since long overshadowed the more famous DeBeers in the diamond market.

Rough Diamonds - India Processes 70 % of Global Production

"We (Indian firms) will be buying diamonds worth $2.1 billion from Alrosa in the next three years," Gems and Jewellery Export Promotion Council Chairman Vipul Shah confirmed.
India sees this as a big opportunity to be grabbed to turn Mumbai into a rival to Antwerp and Dubai. “We are talking to the Government to give us a tax regime for diamond traders similar to Antwerp which has a small presumptive tax on trading profits and allows miners to bring sparklers here, sell whatever they can and take back unsold stones without taxes and hassles,” said Pankaj Parekh, vice chairman of the Gems & Jewelery Export promotion Council.
Russia is not averse to this as US and European sanctions means that it may not be able to sell directly in Antwerp, the largest market for diamonds in the world, and may have to resort to the Cold War period subterfuge of selling its diamonds through DeBeers or some other diamond miner.

The Modi-Putin Diplomatic Tango

At the `World Diamond Conference' here, the `Big Boys’ of the global diamond market – Alrosa, DeBeers, Rio Tinto came to mingle with India’s diamantaires. India already processes some 70 per cent of the world’s diamond roughs into polished diamonds or sets them into jewellery to be sold all over the world.
Forecasts by diamond miners’ associations say that the market for retail or finished diamonds in India and China is rising and taken together could equal that of the US, currently the world’s largest market within the next 6-7 years.
Alrosa’s interest in striking direct deals with Indian firms is but natural says Parekh. Polyakov avers : “We follow the trade.”
Parekh and other GJEPC office bearers have been doing the rounds of North Block and global mining capitals to try get their dreams of Mumbai rivalling Antwerp as a trading centre off the grounds. “Does Mumbai have the potential to be a diamond hub?,” asks Polyakov rhetorically. “I think the answer is – yes – you just need to follow rules  that other hubs do.”
There is of course more than `following the trade’ or `potential’ involved here. Russia is perhaps trying to make a statement to both India and the West. Russian analysts in recent weeks have been at pains to stress that sales of helicopters to Pakistan does not mean that the `special relations’ with India are to be endangered and the high profile visit along with help in transforming Mumbai into a diamond trading hub along with key defence, gas and nuclear deals are expected to be part of that statement.

Mumbai- the New Diamond Capital?

Thumbing Russia's nose at western sanctions is of course something which Putin has been working at for quite some time with gas deals with China and East European nations.  A diamond deal with India could well help him teach the European Union with which Russia is locked in a conflict over Ukraine, that in the resources market, it still counts.