Falling prices to reduce ballooning CAD, inflation
The falling global commodity prices in recent weeks will help the Indian economy immensely to rein in the burgeoning current account deficit, while tempering inflation.
C Rangarajan chairman of the prime minister's economic advisory council feels it will also revive exports, thereby helping the balance of payments situation.
Globally, analysts are predicting better times for economies as tumbling oil and commodity prices can eventually lead to cheaper food, rising profit margins and lower airfares.
“Weaker commodity prices should be positive for the world economy on average because falling inflation supports consumer spending,” said ABN-AMRO economist Han de Jong. Economists at JP Morgan estimate a 15 per cent drop in the crude price would be enough to lift global economic output this year by 0.2 percentage points.
India’s leading statistician and chairman of the national statistical commission, Pronab Sen, believes softening commodity prices will push economic growth indirectly, as inflation will moderate and the fiscal deficit will narrow because of the reduction in oil subsidy outgo.
Unlike commodity exporting countries in West Asia and Russia, India stands to gain from falling international prices, as it depends on imports for 80 per cent of crude oil requirement accounting for over $120 billion, and several other raw materials like coal. Also, gold imports account for about $50 billion annually.
“There are several factors that are operating. The commodity prices are somewhat softening. The world economy is also slightly better than last year. All of these factors should contribute to pick up in exports and reduction in rate of growth in imports. The balance of payments situation should be better…,” Rangarajan told reporters after launching the UN Economic and Social Commission for Asia and the Pacific (ESCAP) during the weekend.
A sharp fall in crude oil prices and crash in international prices of several other commodities, mainly gold and other metals, have reversed the sombre mood in Indian industry, and should add 1.5 percentage points to the country’s GDP growth in financial year 2013-14, an analysis by trade and industry lobby Assocham said.
“Thus, from just about 5 per cent GDP growth in financial year 2012-13, we can go up to 6.5 per cent or even more to about 6.7 per cent in the current financial year, riding on the commodity crash,” the study said.
India’s GDP growth fell to 4.5 per cent in December quarter of 2012-13, sparking fears that the year may end up with growth at less than 5 per cent. The latest economic survey has projected growth in 2013-14 between 6.1 per cent and 6.7 per cent.
Several rating agencies have forecast a pick-up in economic growth in 2013-14, though at a modest 6 per cent or so. But these projections were made before the global commodity prices plummeted.
Indications are that crude oil prices will continue to moderate in the next few months.
“Rather than riding on the commodity boom, India’s economic growth rides on the bust. Peculiar and paradoxical it may sound, but it is exactly so,” said the Assocham paper, adding the positives of the commodity softening will work on several fronts. First, it will drastically bring down the country’s imports bill which is largely driven by crude oil and gold. Against a mammoth $190 billion trade deficit in FY 13, it would not exceed $170 billion in FY14.
Crude oil prices have fallen from $110-115 per barrel a few weeks ago, to less than $100 a barrel and are still falling.
Also, exports have started looking up since November and has returned to positive territory after clocking negative growth in the first nine months of 2012-13. Since December, exports growth has been improving, and touched 7 per cent in March. Going by this trend, exports can only improve in 2013-14, DGFT Anup Pujari said.
“The spin-off will be revival in consumer demand and reduction in the cost of production for companies, which will, in turn, lead to higher earnings….Thus, the cyclical factors will turn positive,” the Assocham paper said. The impact on improved earnings will be seen from the second quarter of the current financial year.
But Sen of national statistical commission told Financial Chronicle that while falling commodity prices will no doubt help push growth indirectly, India’s growth slow down is mainly because private and public sector companies are not investing in capacity build-up. If this happens now, it will make a huge impact on growth.
“India’s GDP growth has slowed sharply to 5 per cent in FY13 from 9.3 per cent in FY11, we expect a pickup in FY14 to 6.4 per cent, above consensus of 6.1 per cent,” the global brokerage firm Goldman Sachs said in a recent report.
The key to improvement in activity during FY14 is a pick-up in the investment cycle, including greater government capex, falling rates, policy reforms to ease bottlenecks, and growth in manufacturing exports.
However, Assocham president Rajkumar N Dhoot said, the high level of leveraging in different sectors like telecom and realty will continue to cause problems for certain sectors, thus maintaining pressure on the quality of the assets with banks.
Gold has come off its high of Rs 32,000 plus in November and is now finding it difficult to gain support even at Rs 25,000 per 10 gm. Most other metals like silver, steel and aluminium are also trading low.
On the flip side, there could be some negative impact on companies producing commodity-driven products like steel and aluminium. As it is, steel consumption has come down worldwide, and a further fall in prices would worsen matters.
“New investments may not come in these sectors, unless demand is driven back by low prices”, the Assocham paper said. Iron ore exports, which have done rather badly so far, will come under further pressure.
According to the Goldman analysis on the relationship of interest rates and investment demand, a 1 per cent decline in short-end rates (three-month CD) leads to a 2.7 per cent increase in gross fixed capital formation (GFCF). The impact happens with a lag of four quarters. They also found that a 1 per cent fall in the 10-year government bond yield raises the index of industrial production (IIP) by 2.6 per cent, but with a lag of only two quarters.
So, monetary easing in recent weeks is likely to help push growth this financial year and further easing expected in RBI’s May 3 money policy would be a bonus.
C Rangarajan chairman of the prime minister's economic advisory council feels it will also revive exports, thereby helping the balance of payments situation.
Globally, analysts are predicting better times for economies as tumbling oil and commodity prices can eventually lead to cheaper food, rising profit margins and lower airfares.
“Weaker commodity prices should be positive for the world economy on average because falling inflation supports consumer spending,” said ABN-AMRO economist Han de Jong. Economists at JP Morgan estimate a 15 per cent drop in the crude price would be enough to lift global economic output this year by 0.2 percentage points.
India’s leading statistician and chairman of the national statistical commission, Pronab Sen, believes softening commodity prices will push economic growth indirectly, as inflation will moderate and the fiscal deficit will narrow because of the reduction in oil subsidy outgo.
Unlike commodity exporting countries in West Asia and Russia, India stands to gain from falling international prices, as it depends on imports for 80 per cent of crude oil requirement accounting for over $120 billion, and several other raw materials like coal. Also, gold imports account for about $50 billion annually.
“There are several factors that are operating. The commodity prices are somewhat softening. The world economy is also slightly better than last year. All of these factors should contribute to pick up in exports and reduction in rate of growth in imports. The balance of payments situation should be better…,” Rangarajan told reporters after launching the UN Economic and Social Commission for Asia and the Pacific (ESCAP) during the weekend.
A sharp fall in crude oil prices and crash in international prices of several other commodities, mainly gold and other metals, have reversed the sombre mood in Indian industry, and should add 1.5 percentage points to the country’s GDP growth in financial year 2013-14, an analysis by trade and industry lobby Assocham said.
“Thus, from just about 5 per cent GDP growth in financial year 2012-13, we can go up to 6.5 per cent or even more to about 6.7 per cent in the current financial year, riding on the commodity crash,” the study said.
India’s GDP growth fell to 4.5 per cent in December quarter of 2012-13, sparking fears that the year may end up with growth at less than 5 per cent. The latest economic survey has projected growth in 2013-14 between 6.1 per cent and 6.7 per cent.
Several rating agencies have forecast a pick-up in economic growth in 2013-14, though at a modest 6 per cent or so. But these projections were made before the global commodity prices plummeted.
Indications are that crude oil prices will continue to moderate in the next few months.
“Rather than riding on the commodity boom, India’s economic growth rides on the bust. Peculiar and paradoxical it may sound, but it is exactly so,” said the Assocham paper, adding the positives of the commodity softening will work on several fronts. First, it will drastically bring down the country’s imports bill which is largely driven by crude oil and gold. Against a mammoth $190 billion trade deficit in FY 13, it would not exceed $170 billion in FY14.
Crude oil prices have fallen from $110-115 per barrel a few weeks ago, to less than $100 a barrel and are still falling.
Also, exports have started looking up since November and has returned to positive territory after clocking negative growth in the first nine months of 2012-13. Since December, exports growth has been improving, and touched 7 per cent in March. Going by this trend, exports can only improve in 2013-14, DGFT Anup Pujari said.
“The spin-off will be revival in consumer demand and reduction in the cost of production for companies, which will, in turn, lead to higher earnings….Thus, the cyclical factors will turn positive,” the Assocham paper said. The impact on improved earnings will be seen from the second quarter of the current financial year.
But Sen of national statistical commission told Financial Chronicle that while falling commodity prices will no doubt help push growth indirectly, India’s growth slow down is mainly because private and public sector companies are not investing in capacity build-up. If this happens now, it will make a huge impact on growth.
“India’s GDP growth has slowed sharply to 5 per cent in FY13 from 9.3 per cent in FY11, we expect a pickup in FY14 to 6.4 per cent, above consensus of 6.1 per cent,” the global brokerage firm Goldman Sachs said in a recent report.
The key to improvement in activity during FY14 is a pick-up in the investment cycle, including greater government capex, falling rates, policy reforms to ease bottlenecks, and growth in manufacturing exports.
However, Assocham president Rajkumar N Dhoot said, the high level of leveraging in different sectors like telecom and realty will continue to cause problems for certain sectors, thus maintaining pressure on the quality of the assets with banks.
Gold has come off its high of Rs 32,000 plus in November and is now finding it difficult to gain support even at Rs 25,000 per 10 gm. Most other metals like silver, steel and aluminium are also trading low.
On the flip side, there could be some negative impact on companies producing commodity-driven products like steel and aluminium. As it is, steel consumption has come down worldwide, and a further fall in prices would worsen matters.
“New investments may not come in these sectors, unless demand is driven back by low prices”, the Assocham paper said. Iron ore exports, which have done rather badly so far, will come under further pressure.
According to the Goldman analysis on the relationship of interest rates and investment demand, a 1 per cent decline in short-end rates (three-month CD) leads to a 2.7 per cent increase in gross fixed capital formation (GFCF). The impact happens with a lag of four quarters. They also found that a 1 per cent fall in the 10-year government bond yield raises the index of industrial production (IIP) by 2.6 per cent, but with a lag of only two quarters.
So, monetary easing in recent weeks is likely to help push growth this financial year and further easing expected in RBI’s May 3 money policy would be a bonus.
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