While the global economy may be “dancing to the synchronised beat of a cyclical upswing in Europe, China, US, Japan and an emerging Asia”, as many economists/ investors like to define the current economic situation, India may suddenly find itself dancing out of tune.
A host of global factors could potentially throw Budget numbers awry and derail India’s growth story, despite the world enjoying its best time since the financial crisis of 2007-08. Global gross domestic product growth is set to touch the 3.7% mark in 2018, after growing at 3.6% in 2017, and global trade is likely to moderate to 4% this year from 4.2% a year ago, according to the International Monetary Fund.
The oil arithmetic
High crude prices can play spoilsport. They crossed the $65 per barrel mark in December, a first since May 2014, and can play havoc with the country’s fiscal arithmetic. India imports nearly 80% of its crude requirement and crude accounts for 21.8% of the country’s import basket. Not only can it jack up India’s total import bill and adversely impact its balance of payments (BoP) position, it can also hurt its current account deficit (CAD) and fiscal deficit numbers.
Its significant weight in the wholesale price index (WPI), 13.1%, means that it can push inflation rates beyond the comfort of the Reserve Bank of India, thereby shutting out any possibility of an interest rate cut. Lastly, the government’s subsidy bill on liquefied petroleum gas (LPG) and kerosene provided to below the poverty line (BPL) families too is likely to go up.
The steep fall in crude prices between 2013-14 and 2015-16 - nearly $60 a barrel -helped the government bring down the CAD from 5.5% in 2013-14 to 2.5% in 2015-16, and also hike excise duty on petrol and diesel without impacting retail inflation. Most brokerage and think-tanks are already factoring in higher oil prices for 2018-19 and therefore a higher CAD and fiscal deficit.
CRISIL Research expects Brent crude to stay in the range of $55 to $60 a barrel in 2018. While the US Energy Information Agency pegs it at $57 a barrel because of the geo-political tensions between Saudi Arabia and Iraq and the supply cut of 1.8 million barrels of crude per day by the Organisation of Petroleum Exporting Countries (OPEC), among other factors. “A $9 dollar rise in crude prices per barrel in FY18 - from an average of $48.5 in FY17 to $ 57.5% this financial year - is likely to push the CAD from 0.7% in FY17 to 1.5% in FY18. A $10 hike in crude prices can push the CAD/ GDP ratio by 60 basis points or 0.6%,” says the CRISIL Research report.
The days of easy and cheap money for governments and India Inc. for development -through the foreign direct or portfolio investments route that flooded the emerging economies facilitated by the central banks of advanced nations - may soon turn into a trickle. The U.S. Federal Reserve has already said it will shrink its balance sheet by $10 billion a month and will reduce $50 billion by December 2018. Moreover, its recent Tax Cuts and Jobs Act 2017 which brought down the corporate tax rate from 35% to 21%, allowing easy repatriation of money stashed abroad, and the plan to hike interest rates at least three times this year, can also see the flight of capital back to U.S. shores, considered a safe haven. According to the IMF’s Global Financial Stabilisation Report of October 2017 as the Fed normalises its monetary policy, it could reduce portfolio flows by $35 billion a year in the next two years. “Hence, the cumulative impact of external forces on portfolio investments between 2017 and 2019 will be around 0.25% of the GDP, much lower than the 1.45% for South Korea.”
While the impact may be much less, it will still be felt as the central banks of Japan and European Union start tightening their belts by drastically cutting their bond-buying plans. Moreover, as the Japanese and EU economies revive and their companies return to profitability, it is only natural that much of those profits will be ploughed back into those companies, instead of finding new destinations for their investments.
The commodity conundrum
China’s economic recovery in recent times also means that other commodity prices too are on an upswing. According to the World Bank’s Commodity Markets Outlook October 2017, “metal prices are expected to surge 22% in 2017 due to strong demand and supply constraints, notably Chinese environmentally-driven supply cuts. With the exception of iron ore, metal prices are expected to gain marginally in 2018”.
The roller-coaster ride for most emerging nations is over. It is time to embrace the brave new world.