Pax Indica

While demonetization, the sabre-rattling between India and Pakistan and the rancor filled  spat between India’s current political Goliath – Narendra Modi - and the Gandhi family scion – Rahul Gandhi – oft derided as `Pappu’ in social media, may have been what hogged headlines through the year, a little noticed statistical change underlined a trend that has been going in India’s favour  for the last several decades now.

India’s economy pipped that of its former colonial master Britain on the back of a  spectacular growth story spanning two-and-a-half decades and a drastic fall in the value of the British Pound after a vote in the island nation to exit from the European Union.

This makes India the 6th richest nation in terms of nominal Gross  Domestic Product or GDP, just behind France, though in terms of per capita income, the Asian giant remains at a lowly 149th .  In terms of GDP calculated using a complicated purchasing power parity formula which takes into account how much a dollar buys in a particular country, India is already the third richest nation after the US and China.

A 20 % decline in the value of the Great Britain pound through 2016, saw the former colonial power’s GDP slipping to $ 2.29 trillion, compared to India’s $ 2.30 trillion.  This gap is however expected to widen as India grows at between 6 – 7 % per year compared to Britain’s 2-3 % annual growth.

India was supposed to surpass Britain’s economy by 2020. However the quicker overtake by the former colony happened partly because she grew faster over the last decade or so and partly because of Britain’s own economic woes.

This marks an milestone of sorts for India’s economy which went into a decline after the British invaded the sub-continental nation taking advantage of India’s political disunity after the decline of the Mughal empire.

India in the 18th century produced 22.5 % of the globe’s GDP. In contrast in the same era, Britain accounted for just 1.8 % of world GDP. By 1820, when the British had more or less conquered most of India, the sub-continent’s share of the world economy had started declining and accounted for 16 % of world GDP.

Colonial rule turned India into a market for Britain’s industrial revolution as compared to a net exporter of spices, silks, cotton textiles and luxury goods. At the same time, high taxes which an arrogant  East India Company and afterwards British Queen  imposed on its conquered people  helped transfer India’s silver stock to the wind-swept, previously impoverished British Isles.

History has had many milestones which underline or accentuate a trend. India’s defeat at the hands of the British at Plassey in 1757, is widely considered a symbol of India’s and Asia’s fall from power. Similarly, Japan’s victory over Russia in 1905 is seen as marking the resurgence of Asia, giving revolutionaries in India and China confidence to fight to shake off their respective colonial shackles.

While the US victory in World War II  was seen as the beginning of the end of European dominance and the start of a bi-polar world, where besides the power which the USA emanated and used, America’s icons – jeans, pop music and Coca-Cola along with Hollywood movies - became pan-global symbols.

It may not be correct to place India’s upsetting Britain in the economic rankings at par with these epoch making events,  however, it does mark a trend.

Since 1947, when India won her freedom, economic growth grew at a leisurely 3.5 % annually, dubbed by the economist KN Raj as the `Hindu rate of growth',  as the country tried to cope with the aftermath of partition with its mass migration of millions of people; several wars; an unprecedented refugee crisis triggered by Pakistan’s 1971 civil war; natural calamities;  even as it built up an infrastructure for steel-making and machinery manufacture, harnessed its turbulent rivers to produce hydro-electric power, built colleges to produce one of the largest army of  scientists and engineers.

In the 1980s, a spate of trade and currency reforms ushered in under the tutelage of Pranab Mukherjee, then finance minister quickened the pace of growth to over 5 % for the first time. A burst of reforms which unshackled the economy  in the 1990s, curated by Dr Manmohan Singh saw growth leap to beyond 6 %. Through the last two-and-a-half decades the average GDP growth has averaged between 6-8 % annually, helping India turn into a two trillion dollar plus economy.

India’s ability to win a spectacular military victory in 1971, in just 14 days liberating Bangladesh, a nation the size of Greece, its ability to test a nuclear bomb in 1974 and launch a satellite in the very next year had marked India’s arrival in the global power stage. However, its image as a poor, third world nation with its crowd of motely beggars and snake-charmers and streets where elephants and camels still roamed persisted for decades afterwards.

By the late 1990s, by when the impact of India’s Perestroika were visible and by when the nation had been hailed as the software factory of the world, that image started changing. The overtaking of Britain, its former colonial master, was in a sense a continuation of the new narrative that India had started building for itself.

Psychologically, India overtaking Britain in the GDP rankings underlines an emerging trend, which acknowledges India’s arrival at the head of the table and marks a sea- change in relations’ between a former colony and the rest of the world.

British Prime Minister Theresa May at an Indian temple

This economic strength acquired over decades is what gave  India the ability to tell off British Prime Minister Theresa May when she refused to relent on the tough visa norms her government has adopted against Indians, while seeking a free trade deal with the Asian powerhouse. The new `Iron Lady’ had to fly back to London without a deal. 

However, before our rulers of the day pat themselves on the back and lay claim to this milestone, let us be very clear that the credit for this goes to the hard work put in daily by more than a billion ordinary Indians and their sacrifice of saving nearly a third of their incomes for the betterment of future generations, despite the glitter of consumerism unfolding before their eyes.

Our leaders need rather to remember that India still has a long path to traverse as it strives not only to feed, educate and keep healthy a huge population but to increase their average wealth at a fast pace so that they enjoy the benefits of a standard of living nearer  to that of the first world citizens.

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 !