Oil On The Boil

Saudi oil pro­duc­tion badly hit by re­gional strife, In­dia must take pro­tec­tive eco­nomic ac­tion

The Times of India (New Delhi edition) - - An Ecstasy Of Ideas -

If you thought the great­est threat to the global econ­omy is posed by US-China trade wars, think again. In fur­ther ev­i­dence of the eco­nomic and po­lit­i­cal risks posed by pop­ulist na­tion­al­ism now shared by coun­tries across the board at­tacks on Saudi Ara­bia’s in­fra­struc­ture, ei­ther by Ye­men’s Houthi rebels who are backed by Iran or by Iran it­self, knocked out half of Saudi oil pro­duc­tion and sent Gulf ten­sions soar­ing. In re­sponse, oil prices in­creased 20% on Mon­day in in­tra­day trad­ing, the largest such gain since the 1991Gulf War.

These de­vel­op­ments will have an ad­verse im­pact on In­dia. There will not be an im­me­di­ate fall­out on en­ergy prices as In­dia’s strategic oil re­serve stocks along with in­ven­tory held by oil re­fin­ers pro­vide a buf­fer of al­most three months. But the un­cer­tainty will show up in fi­nan­cial mar­kets. Also, if po­lit­i­cal ten­sions worsen, the im­pact on oil prices may last. It couldn’t have come at a worse time as we are in the midst of a pro­nounced slow­down in ag­gre­gate de­mand. Not only has in­vest­ment been weak for a few years, even con­sump­tion growth is los­ing mo­men­tum.

Crude price is a fac­tor be­yond the con­trol of govern­ment. How­ever, there are other fac­tors within the econ­omy which can be im­proved. One of the high­lights of In­dia’s eco­nomic per­for­mance over the last few years is a durable re­duc­tion in the rate of in­fla­tion. A soft­en­ing of crude price has con­trib­uted to it; this will be un­der threat if the geopo­lit­i­cal sit­u­a­tion in West Asia de­te­ri­o­rates. If crude prices do harden and stay at elevated levels, there is a strong eco­nomic case to lower elevated taxes on retail petro prod­ucts to en­sure con­sump­tion de­mand is not damp­ened fur­ther.

The most im­por­tant lesson which the govern­ment needs to draw from this episode is that it’s es­sen­tial to fo­cus on the econ­omy. It can­not af­ford to frit­ter away its enor­mous po­lit­i­cal cap­i­tal on so­cially di­vi­sive is­sues. Fast-paced growth will cre­ate con­di­tions which will over­come many of In­dia’s eco­nomic as well as so­ci­etal chal­lenges. It will also pro­vide space for In­dia to pur­sue its larger strategic goals. The win­dow for eco­nomic re­forms pro­vided by low oil prices may not last long. It’s for the govern­ment to use this rare sweet spot to push through re­forms of the mar­kets for fac­tors of pro­duc­tion such as land and labour.

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