Oil On The Boil
Saudi oil production badly hit by regional strife, India must take protective economic action
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.