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 !