Crude shocks keep India in smiles - Dr B. Yerram Raju, Nitin Gupta - Article published in Business Advisor, dated - December 25, 2014 http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume IX Part 6 December 25, 2014 24 Business Advisor
Crude shocks keep India in smiles
Dr B. Yerram Raju, Nitin Gupta
“The economics of oil have changed. Some businesses will
go bust, but the market will be healthier,” says The
Economist (December 6, 2014). Is this the beginning of
cheap oil regime or just an interlude between two big
bumps?
The year 2013, in retrospect, had turned out to be the
strongest year of recovery, with a growing US economy
and a stabilising Chinese economy. Commodity prices
were projected to remain flat with an up-side risk due to
unexpected supply-side shocks.
Enter December 2014 and all the projections seem little more than wishful
thinking. The IMF went on record recently: “The global economic growth
may never return to pre-crisis levels”! All the quantitative easing (QE) from
the US (3 till now – totaling over $4 trillion, or twice that of the entire Indian
economy) which was supposed to push cash to banks ended up just in
increased valuations and stock indices accompanied by higher prices of gold
and other commodities. Emerging economies like India had to contend with
high inflation. Some even said: It is „US Fed exported inflation‟!
Now we‟re in a scenario where the interest rates of most major markets
globally are still at rock-bottom levels (which was the reason to adopt QE in
the first place), and despite additional liquidity with banks and their “better
health” the economy still isn‟t improving.
Initial fears of QE stoking global inflation have reversed now since the
desired impact is clearly missing, and instead we‟re facing fresh fears of
deflation.
Today, 2 of the world‟s 3 biggest economies – US and Japan are reeling with
increasing debt-to-GDP ratio, with the US hovering over 100% and Japan,
at a massive 225%. This means that if the US and Japan were to devote
even a massive 10% of their GDP for debt repayment, it would take them 10
and 22 years respectively to clear their debts.
Another major economy, China, is witnessing falling growth, higher
inventories and housing bubbles, along with many other large economies
like Australia and Euro Zone. Several companies in the Euro Zone have
taken a substantial hit on their revenues due to sanctions imposed on

2. Volume IX Part 6 December 25, 2014 25 Business Advisor
Russia, adversely affecting economies of the few relatively better-off
countries in Euro Zone like Germany.
India, on the other hand, looks relatively promising, despite its close to 66%
debt-to-GDP ratio. The new government has been successful in changing
perception of “doing business in India” in a relatively short time.
India, a net importer of commodities, has also benefitted significantly by
falling commodity prices – most major one being crude oil, since it is the
biggest by import value. Crude oil has fallen below $60 per barrel, nearly
45% since its peak in the middle of 2014, and with OPEC openly stating
against cutting production, it might even fall to $45 per barrel.
While OPEC‟s decision not to reduce output despite such a fall in prices is
being attributed to stifling recent massive US investments in shale oil and to
corner Russia, the fact is that it is a silver-lining in a dark cloud for India.
However, there are significant head-winds ahead for India and the rest of
the world. With Euro Zone unable to move away from the edge of crisis, and
growth in most major economies faltering, India cannot easily export its way
to growth.
Most countries are struggling with low domestic demand due to poor
demographics leading them into a currency race to the bottom, since
depreciated currency will give them better export value.
India, with its demographic dividend (65% of the population under 35 years
of age), must look inwards for growth. No wonder Raghuram Rajan called for
a manufacturing growth, led by domestic markets.
Are the shocks of declining crude prices going to hit the rest of the
commodity markets -- copper, wheat, soybeans and rice? The cost of
production of these commodities could be well on the rise but will be staring
the prices in the eye.
When that level comes, many producers of such commodities might
temporarily halt production, and that could impact GDP growth adversely
and stoke inflation.
Global economy could be in a mess. Indian economy would for some time be
in smiles as it triggers a lower inflexion point in inflation and the
consequent abatement in interest rates. Year 2015 would begin on a happy
note.
(Dr B. Yerram Raju is Risk Management Consultant, and Nitin Gupta is
Managing Director, Risk Edge Solutions (P) Ltd. www,riskedgesolutions.com)