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Sunday, June 15, 2014

Beyond The Vagaries Of Oil Prices


Beyond The Vagaries Of Oil Prices

What does the ongoing unrest in Iraq mean for the fledgling Modi Government? It certainly means higher petrol, diesel, jet-fuel, gas and kerosene prices in the near term, sharply higher subsidy burdens, already at $ 27 billion, and cost-push inflation due to increased cost of transportation.

However, for one reason or the other, including wars and tension in the Middle East, petroleum prices have been elevated throughout the global economic downturn since 2008. It defeated the strategists in the UPA, who did nothing to combat its pressures.  But this is a problem that is unlikely to abate, and must be worked into the Modi Government’s plans to revive the economy.

This particular ISIS led emergency in Iraq could well blow over, buckling under threats of direct support both from the US and Iran, with several US warships taking up position. And also, probable lack of funding from Al Qaida in the longer term, because of too many commitments to global jihad. But the simmering discontent and instability will continue, in the signature form of terrorist strikes, assassinations, bombings and guerrilla warfare.

The ‘Arab Spring’ type movements against authoritarian regimes, towards a greater say if not quite democracy, in parallel to the fundamentalist movements will keep the region in turmoil.

Extremist organisations, with their anti-Semitic, anti-Monarchist, anti-Hindu, anti-Christian, anti-moderate Islam, anti-Capitalist positions, such as Al Qaida, the Afghan and Pakistani Taliban, the Lashkar-e-Taiba etc. are spread out all over the Islamic world. In the Middle East there are constant eruptions, part ‘liberation’ movement, part terrorist subversion, including those in Libya, Egypt, Tunisia, Morocco.

Others thrive in Syria, Lebanon, Palestine, Iraq, Sudan, Ethiopia, Chad, and Iran, amongst others. Next door in nuclear Pakistan, and Afghanistan too, there are serious and dangerous jihadist movements.   All these together will keep up the pressure on the pricing of petroleum from the OPEC region, as well as its uninterrupted availability.

The situation suggests, at a minimum, that inflationary pressure is a given constant, from the 75 per cent or so of our imported petroleum. Iraq is only second to Saudi Arabia in terms of our suppliers, and accounts for nearly 20 per cent of our oil imports.

We can, of course, diversify our oil imports from sources outside the Middle East - from Russia, Kazakhistan, South America, but at what cost?

In addition, to prevent it playing havoc in our economy, we must do as much as possible to strengthen our balance sheet, particularly with the GDP at record lows. And perhaps Prime Minister Narendra Modi was hinting at this when he spoke of a ‘bitter pill’ coming up with regard to the economy.

We need to do away with subsidies on oil, gas and fertilizers, to reduce our fiscal deficits by several lakh crores of rupees or that estimate of $27 billion and climbing. On top of our farm support prices and many welfare schemes, it is ballooning the fiscal deficit to dangerous levels, constantly weakening our currency, and increasing the current account deficit too.

Without urgent and firm action on the part of the Indian Government, it will scare away FDI, and result in an international sovereign ratings downgrade to ‘junk’ status investment-wise. This, in turn, will make foreign borrowing all but impossible.

We cannot do very much to reduce our dependence on imports of petroleum products in the absence of adequate discoveries in our own country though we must keep trying. We can, and must, get on with steps that can secure our position to some extent.

One such step is to fast track the Iran-India undersea gas pipeline. On completion, it is likely to give us gas at affordable prices over the long term. Another is to accelerate the public-private help towards developing Chabahar Port in Eastern Iran. This will give India preference to receive Iranian oil too on favourable terms. Third is to ramp up our petroleum refining capacities so that we can process more of this Gulf and Middle Eastern crude for domestic and foreign use. Fourth is to reduce our dependence on petroleum in favour of domestic coal, nuclear and other alternative energies wherever possible. Fifth is to cut as many subsidies as possible in the interests of creating a more robust national economy.

All this, coupled with massive public spending, partly via FDI, and also from private-public partnerships, on our outdated infrastructure, can result in millions of new jobs and a sharp fillip to the GDP growth. Reviving the agriculture and construction sectors that account for 17 per cent each of the economy, again with infrastructure upgrades and fresh investment, will enthuse hundreds of millions of people employed in these two areas. Opening up the defence sector to 100 per cent FDI will also be most encouraging both for our security future and export earnings. Raising foreign investment caps on the debt market and in as many sectors as possible will be well received, while deepening and widening the economy. And lastly, freeing the labour market from hire and fire restrictions will encourage investment, improve efficiency, and put paid to trade union militancy.

Despite all this, we cannot help endure a measure of continued inflation because of high oil bills, but can further offset some of its ravages by lowering interest costs and taxes, thereby stimulating investment in business and industry, and creating an atmosphere of renewed optimism.    

(890 words)
May 15th, 2014

Gautam Mukherjee

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