By Uttam Tiwari
In a class of ten brilliant students, all but one started lacking in their performance due to some reason or the other. However, one young girl held her ground. She did not improve much but remained stable while the rest were derailed. For the sake of simplicity and understanding, let’s call her India.
Growth: A Flight or a Farce?
With its strong economic fundamentals and prudent monetary policies, India has sailed through some of the major crises with minimum damage. Even with the uncertainties clouding around due to Brexit, India stands solid as ever. Since it booked a remarkable 7.5% growth in GDP, highest among any of the first and second world nations, it has been a shrapnel in the wounds of the hurt economies. Alongside, it has also been seen as a sweet spot for investors looking for higher returns in a sluggish world. Yet, such high growth figures haven’t barred criticism.
Many analysts and economists have expressed reservations about the growth numbers. They question the methodology used by the government that produces inflated results, claiming it to be a mere statistical trick.
Is the Crude Oil Price Crash Responsible?
Dubiousness surrounds the sustainability of such high growth, attributing India’s good luck in betting short on global oil prices. It has been argued that the crash in oil prices from $150/barrel to $40/barrel is the sole reason for India’s lower inflation and high growth. Interestingly, Japan, Brazil, Germany, UK and France, also among the top ten importers of crude oil, haven’t shown any strong negative correlation between their growth rates and the prices of oil.
India’s import comprises of around 80% crude oil. With the fall in prices, it has been able to save more than $7.5 billion every month on import bills. On the other hand, our rainfall based agricultural sector has experienced monsoon failure in 2014 and 2015. This has resulted in considerable food inflation. The export sector, too, witnessed a consecutive 17-month fall. This caused a cumulative 15% reduction in export bills in the year 2015-16. Evidently, luck knows its way around.
The calculation of CPI assigns a weightage of 6.2% to fuel and power as against 57% to food. Clearly, the headline inflation index of India is more sensitive to food prices than it is to oil prices. A study paper by IMF economist Sajjid Chinoy, Prachi Mishra and Pankaj Kumar has shown that a percentage increase in global oil prices has an effect of 1 bps on India’s inflation index i.e. headline CPI. The reason behind this is that the government hasn’t passed the benefit of the price fall to the ultimate consumer. The fall in oil prices between 2014 and 2016 has been around 56%. Yet, petrol and diesel prices have been cut by mere 13% and 21% respectively.
For obvious reasons, India certainly has benefited from the fall in prices of oil. But had it been the sole driver of growth, countries like Brazil, France and Germany would have shown the same trend. Meanwhile, government’s sly move to cut down oil subsidies and increase the fuel tax at a time when it would hurt the consumers the least, doesn’t need a pro-BJP to be appreciated.
Fallacies in the Indian banking model exposed by rising NPA’s, Chinese slowdown, uncertain Fed rates, unsettling oil prices and now the theatrical over Brexit are similar to what the global issues economies are struggling with. These uncertainties have caused a flight to safety in the global market, mainly towards UST-Bills and Gold. This leaves emerging markets, such as ours, volatile over the edge. The Indian equity market was ranked 9th on the basis of market capitalization in 2014. However, the vicissitudes of markets are inevitable. Despite India being one of the poor performers this year, optimism has not left the markets yet.
To boost investor confidence, the government has targeted a fiscal deficit at 3.6%. It was later revised to 3.9%, providing for an increase in expenditure on infrastructure. The government has taken major steps to reduce the dependence of rural India on monsoon. It has done so through investment in infrastructure, transferring benefits to rural farmers, and boosting financial inclusion (covering 200 million people this year).
Capabilities and Handicaps
Since 2014, Indian equity market has shown an upward trend. Therefore, analysts believe that the current fluctuations in the market and the sell-out of the foreign portfolio are merely a correction instigated on global cues.
These are also partly due to government’s failure to pass awaited legislations on time. Indian markets haven’t touched their peak yet and once the global adversities vanish, India is all set to rally.
Investors have taken a long position on India, relying on its long-term growth. They have especially betted heavily on some sectors like consumer products and renewable energy. India’s current growth has been attributed to private consumption as it is a home to 1.2 billion people, including 234 million youth (between the ages of 15-25 years).
With an average age of 27 years – youngest among China, US, UK and Japan – India is not only one of the largest markets for consumer products but also a pool of young and talented labour with high potential productivity.
On the energy front, India is seen not far from being an energy surplus nation. But the real deal lies in the renewable energy sector where India holds advantages. Its geographical location allows it to exploit energy sources like solar, wind as well as tidal, effectively and efficiently. Given the population explosion, a high future demand for energy necessitates investment here.
Optimism Could Go A Long Way
At ground level, needless to say, India needs reforms to raise the quality of life and standard of living. For this, a consistent and high GDP growth can be a head start. Reports which mock India’s celebration of high growth as exaggerated are well ignorant of the extraordinary gaps in development. All the G7 countries, or the so-called developed nations, are those who were independent before the industrial revolution took place. They had begun exploiting technology decades before India took the path to development.
While becoming the next super power is a distant dream, India’s coming up as a strong leader of emerging markets does seem inevitable.
Uttam Tiwari is a third-year student pursuing BCom(H) at St. Xavier’s College, Kolkata.
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