Why Cong needs a meltdown in commodities before 2014

By R Jagannathan

Is the Indian economy about to get a largely undeserved leg up from falling commodity prices? The UPA will certainly be hoping so.

If you were to ask Ruchir Sharma, Emerging Markets Head at Morgan Stanley Investment Management and author of the best-seller Breakout Nations, the answer is yes.

Even while everybody has been wondering if the recent fall in oil and gold is a temporary response to weakening Chinese demand, Sharma has rushed to confirm that the China- commodities link is broken. He is talking about the belief that that a rising China and its voracious demand for all kinds of raw materials would put commodities on a perpetual escalator.

This was the belief that sent commodity prices soaring over the last decade - till the financial meltdown intervened in 2008.

Writing in The Economic Times , Sharma asserts that “the China-commodity connection is breaking. After three straight decades of ultrafast growth, China’s slowdown has let air out of the bubble: since the peak in April 2011, the broadest available measure of commodity prices has fallen 16 percent. In recent months, money has started flowing out of exchange-traded funds for most commodities.”

For India, this is unadulterated good news, if Sharma is right. Reason: our problems stem partly from the high prices of crude oil and gold, both of which constitute our top two import items. Both have been falling of late. Moreover, given our huge subsidies bill, a fall in crude means a lower fiscal deficit. P Chidambaram could not have asked for more.

In 2008, the UPA was re-elected largely because the Lehman crisis sent commodity prices crashing, bringing inflation to below zero at one point. UPA-2 managed to screw up when commodities sprang back to life, aided by unlimited money printing after 2008-09, both at home and abroad.

To be sure, no one can predict that commodity prices will indeed keep falling, but Sharma is convinced that the long-term trend of “one decade up and two decades down” will hold this time too.

He said: “For the last 200 years, the average price of commodities has followed this predictable cycle: one decade up, often sharply, followed by two decades down, with the result that real prices haven’t risen since 1800. There are exceptions. Some commodities, including oil and copper, have gained somewhat in real terms. But gold has just retained its value. The price today (about $1,500 an ounce) is roughly the same as in 1980, when adjusted for inflation.”

But then gold is not like other commodities. It is money. And if money can retain value over long periods of time, it has served its primary purpose. This is not something one can say about paper money.

But governments continue to print money like there is no tomorrow. Even as the US has been throwing mild hints of ending its quantitative easing (but not before end-2013 at any rate), Europe has shown no such inclination, and Japan has just restarted big money printing.

Chidambaram may hope Sharma is right, but he should keep his fingers crossed on crude prices. If Sharma is wrong, the Congress’ hopes of finding easy money for a pre-election binge will fade.

The Congress badly needs a commodities meltdown before 2014.