In January 2016, the price of crude oil stood at $27.67 a barrel; now crude prices have been hovering at around $80 per barrel. Many expect that prices may reach $100 a barrel soon. In India, petrol pumps are selling nearly ` 85/litre (petrol), and `80/litre (Diesel) with slight differences in states. The dollar stands at nearly `74.50.
Corporates feel that the rise in fuel prices and depreciating rupee has battered the corporate sentiments. The poor GST collections, account deficit going upward, global trade war, rising commodity prices and weaker rupee have made businessmen quite sad and tense about the near term future.
Perhaps, the times of the current national government is not good, as the international scenario is highly volatile and tense, given the fact that Iran is facing stiff sanctions and India has to look towards Saudi Arabia for its oil import. However, Saudi Arabia is facing tremendous economic crisis since the new prince Mohammad Bin Salman stealthily took over the control of the monarchy there.
On the other hand, falling rupee is another national headache for the government as importers are crying and Indian students studying in overseas colleges have to spend more than earlier.
Falling index & ominous future:
Indeed, the fall in national economy since recent past has brutally broken the confidence of business world. As per latest reports, the index keeps falling for the second straight quarter in the July-September 2018 period. Also, the business confidence index (BCI), on a scale of 100, dropped to 48.7 as compared to 49.3 in the previous survey and 50.6 in the quarter before that.
If the oil prices are not contained and falling rupee is not controlled, many more parameters are expected to worsen in the current quarter, including overall economic situation, businesses, raw material, supply chain, banking, imports and cost. As per latest survey, 56% corporate leaders expect the cost of raw material to rise in the current quarter as compared to 42 per cent in the previous survey. The survey also predicts worsening of CAD to affect the economic fundamentals if oil prices go further. The corporate also fear that the utilisation of production capacity may slow down in the October-December quarter.
Falling Rupee destabilizing economy:
Rupee has become Asia’s worst-performing currency, and has forced the Reserve Bank of India (RBI) to think effective measures to control the worst fall in last seven years. The forex reserves came down by $5.14 billion in the seven days ended October 12, the biggest weekly decline since November 2011. The RBI sold dollars to control the fall.
The current bad shape of Indian economy has demoralized the foreign investors who are exiting India’s equity and bond markets. As per latest data, foreign funds took out about $13 billion from local bonds and stocks so far this year, resulting in the rupee declining about 13%. Also, non-performing national banks coupled with scams and astronomical NPAs have added to the turmoil in markets.
In fact, this is longest falling rate of the rupee since 2002 which has declined for six straight months in a row, while rising oil prices fuelled concerns about a widening current account deficit and inflation amid a rout in emerging markets.
Clueless Modi government:
The Prime Minister Narendra Modi too appeared tense over high oil prices which has stalled India’s growth rate. On 15 October, he held a meeting of top oil leaders from the gulf and country and pitched for a rupee payment mechanism to partly cushion India’s oil import bill from the impact of the falling local currency. He addressed leaders of domestic and global oil industry injcluding Khalid A Al-Falih, Saudi Arabia’s energy minister and head of Saudi Aramco.
The PM used allegorical term to drive his message, “Don’t kill the goose that lays the golden egg.”
The India’s oil minister Dharmendra Pradhan too looked clueless while speaking at the India Energy Forum recently. He said that the country is facing severe headwinds from rising oil prices, which have risen by 50% in dollar terms and 70% in rupee terms in the last one year.
Though, the government had cut excise duty on petrol and diesel in September end to tame public outcry, which was the second reduction in a year, it failed to tame the runaway pump prices. As few states and general elections are on the horizon, the BJP government is finding it tough to control public opinion and the tide seems to go against it.
India is the third-largest oil consumer in the world and is seen driving incremental demand over the next decade. As the oil hungry country imports 83% of its oil, rupee depreciation adds to the government’s woes. Falling currency makes oil unattractive as the government has to spend more to buy crude in dollar. It pushes up oil import and subsidy bills.
Upsetting Modi’s math:
Experts say that the lethal combination of falling rupee and rising fuel prices is akin to the combination of two dangerous drugs taken as single dose. This has clearly upset Modi’s math and stops his government to announce any social welfare plans.
Now the government can have only one respite and that may or may not come; only if global suppliers agree to a rupee payment mechanism. Then, the government has to spend less on getting crude than they do currently.
Prime Minister Modi has also warned oil producers like Saudi Arabia that high crude prices are hurting the global economy and sought a review of payment terms to provide a temporary relief to the local currency.
As per media sources, Modi feels, "The oil market is producer driven and both the quantity and prices are determined by the oil-producing countries. Though there is enough production, the unique features of marketing in the oil sector have pushed up the oil prices."
However, the Saudi oil minister Khalid A Al-Falih had already hinted that producers “lose money” at $40-50 per barrel price. He added that though Saudi Arabia is aware of the national pain in India but it is doing everything to tame the prices, though many things are not in its control.
Modi wants investment in local oil exploration:
PM Modi also requested oil leaders in the country to step up new investments in exploration and production to secure oil reserves for future. At the meeting, Modi also made a strong case for a partnership between the producers and consumers to stabilise the global economy which is on path of recovery.
The rising retail prices of petrol, diesel and LPG are posing inflationary risks and together with a sliding rupee threaten to upset country’s current account deficit. The Finance Minister Arun Jaitley and NITI Aayog vice chairman Rajiv Kumar have been asked to discuss emerging energy scenario particularly ripples from US sanctions on Iran and volatile oil prices threatening growth.
Poor industrial/manufacturing growth:
As per official data released by commerce and industry ministry (the Central Statistics Office (CSO) data) on 1 October, the growth of country’s infrastructure industries had slowed to a three month low of 4.2% in August as output of coal, refinery products and fertilisers moderated.
The report added that core sector had grown 7.3% in August and 4.4% in August last year. The slow rate has been reported in six out of eight sectors. The eight infrastructure sectors are coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity; together they constitute 40.27% of the total industrial production. Its cumulative growth in the April to August period was 5.5% compared with 3% in the year ago period.
The ministry said that that Fertiliser production declined after six months. It fell 5.3% in August from a 1.3% rise in July. Cement production rose 14.3% in August from 11.1% in July and natural gas output increased 1.1% from a 5.2% decline in the previous month.
Output growth rate has slowed to 2.4% in coal, 5.1% in refinery, 3.9% in steel and 5.4% in electricity. Crude oil output continued to decline with a 3.7% fall registered in August compared with a 5.4% drop in July.
Positive side effects of falling rupee:
The falling rupee has some serious positive side effects as India got a 7,300 more millionaires during the 12 months to mid-2018, taking the total number of dollar-millionaires to 3.43 lakh, who are collectively worth around $6 trillion.
As per Credit Suisse's 2018 global wealth report, India has one of the highest proportions of female billionaires at 18.6% during the period.
The report said: "By mid-2018, there were an estimated 3,43,000 millionaires in India, a rise of 7,300. These 3,400 have wealth over $50 million, while 1,500 of them have wealth over $100 million each. By mid-2018, in dollar terms wealth in the country grew by a modest 2.6% to around $6 trillion and wealth per adult stayed flat at $7,020 mainly due to the rupee plunge against the dollar.”
The report also warned that the number of the rich as well the inequality is set to widen by over 53% by 2023 when their number is set to cross an estimated 5,26,000 millionaires worth around $8.8 trillion. It added that Indians' personal wealth is dominated by property and other real assets, which make up 91% of estimated household assets.
The report said: “Over the past 12 months, non-financial assets grew by 4.3%, accounting for all of the wealth growth in the country, it noted. House-price movements are a proxy for the non-financial component of household assets, which reached a high of 9% for the country.”
The report estimates: “Women's share of global wealth is around 40%, while recent studies for the country indicate a significantly lower share ranging between 20 and 30%. There is still considerable wealth poverty, reflected in the fact that 91% of the adult population has wealth below $10,000."
The report forecasts that by 2023, the wealth of Indian millionaires is expected to grow by 8% per annum to reach $8.8 trillion with an estimated 5,26,000 millionaires, an increase of more than 53% or 8.9% per annum.