Mustard Yellow, Red Hot, Pure White, Coffee Brown, Mystic Maroon. These colours pretty much describe an Incredible India 1.That of course is India with its wonderful colours of diversity and heterogeneity for the tourists. What about us who have to deal with a set of educated and elected leaders who are incredibly driving this country into a terrible mess?
We all measure the overall health and performance of any enterprise predominantly through its financial performance and then also look at other measures that matter. Should we not benchmark the government too on similar yardsticks? I had made this contrast in an earlier editorial column of an esteemed business daily under the caption “What is our real fiscal deficit?” And in another piece “Governance – What does this really mean?”, my attempts were to focus on other measures (non financial) that count. Both these essays and others are available for reference under the section – Governance – on this site. My assessments on both these perspectives were dismal, depressing, dreary, dull and drab even at a time when the economy and the overall mood of the nation were reported to be very buoyant. Do you recall that often it had the aroma of arrogance?
The inflation is now at a 13 year high of 11.05% and still rising. Oil prices are zooming and likely to hit US $200 per barrel (as some experts predict; it is already US$140). A member of the Economic Advisory Council to the Prime Minister is reported to have said recently “ …the spoiler is oil. It is like fire under the seat”. Look at these :
* Trade deficit is like a towering inferno.
* Fiscal deficit is zooming (even without accounting for many of the off balance sheet items).
* Real interest rates on deposits are lower than the double digit inflation rates.
* Banks will have to raise the interest rates to arrest flight of deposits and to prevent a liquidity crunch.
* This will increase the lending rates.
* Higher borrowing costs will hurt the profitability of businesses.
* Business with spiralling input costs fuelled by inflation and higher financing costs will pile up inventory.
* To reduce inventory, production will have to be cut
* Industry will consider lay off workers and issue pink slips.
* Stock prices will tumble further.
* Unemployment will bring with it, its own miseries and untold sufferings.
* To maintain a minimum standard of living, some more people will resort to unfair means.
* This can take frauds and corruptions to a higher level.
* You bet, unscrupulous political elements will fish in troubled waters.
* A lot more people will resort to suicide to end their miseries.
The whole growth story captured in a picture postcard will begin to get blurred and fade even before the ink dries.
It is all fully wired now and dangerously connected. Does it sound pessimistic? Well, pessimists are informed optimists.
When the budget was presented in February 08, did they have some inkling on the rising crude oil prices? (It was around US $ 100 per barrel then). You could argue – May be not. But could they have? Well, it seems – May be – yes. The reckless exuberance disregarding the rising energy needs of a charging economy finds ugly reflections in the mother of all write offs, now Rs.70,000 Crores (some US $ 17,500 million). As if to add insult to injury, a generous pay hike to government employees costing the nation some Rs.20,000 crores more ( US $ 5,000 million), all seemed with an aim to woo the voters can now all backfire with a furious vengeance what with an emerging new vote bank, thanks to delimitation.
Oil prices are inextricably linked to currency and complex financial markets. It is hard to believe that our clever leaders did not know that institutional investors who manage funds, design complex financial products to mimic the price of crude oil and other energy futures. This type of trading activity adversely impacts the price discovery process. We are now voicing our fears of speculation at the recently concluded Jeddah OPEC rounds. What is the point now in publicly admitting to have discovered this?
In 2004, oil hit an all-time high of $56 per barrel. This was up 366 percent from the $12 low of 1998. Nymex Crude Oil was USD $ 98.19 per barrel on 24 November 2007 (check this out at http://financeminister.gov.in/ ). In the two years between January 2006 and January 2008, dollar oil prices rose by 46 percent. To have ignored the extrapolation of this rising trend of crude oil prices also fuelled by the growing geopolitical threats is a dangerous phenomenon.
In an interesting article in the Business Standard “Who derailed India’s Petro Reforms?” Mr. A.K.Battacharya on 13 May 2008 wrote “—- the blame for having derailed petroleum sector reforms fell squarely on Ram Naik and Mani Shankar Aiyar. It was argued that these two petroleum ministers, under two different governments, did not take full advantage of relatively low levels of international crude oil prices by allowing the oil companies the freedom to fix prices.” The article also mentions “ Naik, Aiyar and Deora might have got the flak, but both the governments had gained immensely by keeping a check on oil prices and, thereby, restricting the inflation rate to a more benign level. Now that the inflation rate has gone up to politically unacceptable levels, the thought of raising petroleum product prices makes all the reform-minded ministers in the present government shudder. The public sector oil companies are bleeding as the international crude oil prices are hovering over $120 a barrel. But not one of those reform-minded ministers has come out in the open in defence of allowing the oil companies the freedom to raise prices and at least reduce their losses” http://www.rediff.com/money/2008/may/13petro.htm
The US caught in a terrible financial crisis must have allowed the US Dollar to soften. With a weak dollar, you can stimulate domestic demand for example by making overseas travel expensive for Americans and preventing them from spending money in other countries that enriches their economies at the cost of the US. Now this is a double whammy. Oil is priced through the US Dollar. So when dollar weakens, the cost of oil rises. Oil producing countries will reap a harvest for the time being hurting everyone else. But this rise in price can eventually destruct global demand for oil and hurt the oil producing countries. But in the interim, countries like Russia will reap benefits from high world oil prices and base metal prices.
With global slowdown, (the oil massage is working) the US can slide its economy back on its rails once again. This is Katrina ( I mean hurricane Katrina) This time it is not going to bring catastrophe to Louisiana and New Orleans but will surely severely hurt New Delhi. In the days to come economic and financial forecasting cannot afford to function like our meteorological department.
Is this a recession or a depression?. Even, the economic pundits don’t know. But for sure a recession is when your neighbour loses his job and a depression is when you lose your job.
1The website of the Ministry of Tourism has been adjudged as the winner of the PC World Web Award 2008 in the tourism category for best design. http://www.incredibleindia.org