Fall in oil prices may fuel NDA’s Raisina run: Accelerating growth due to lower oil prices may boost NDA's chances at re-election

As the Lok Sabha elections come closer, the economy seems to be on the mend. The International Monetary Fund (IMF) in the most recent update to its World Economic Outlook (WEO) has said that economic growth is accelerating in India, while it is slowing down in the rest of the world. That should be music to the ears of the government, which has never tired of pointing out that India is the world’s fastest-growing major economy. But will lower oil prices boost the NDA government’s chances at polling booths? Best of all, the rapid growth is happening with inflation at very low levels. High growth, low inflation—what more could people want? Lower oil prices will boost the economy What could be the secret of the government’s success? After all, only a few months ago economists were issuing dire warnings about a plunging rupee, a widening current account deficit (CAD), higher inflation and lower growth. There is nothing spectacular the government has done in the last few months to engineer a U-turn in the outlook. What then has been the reason for the remarkable improvement in sentiment? While upwardly revising the growth rate for 2019-20, the IMF said, “India’s economy is poised to pick up in 2019 benefiting from lower oil prices and a slower pace of monetary tightening than previously expected as inflation pressures ease.” To be sure, inflation pressures have also eased due to lower food prices, but it is undeniable that lower oil prices have helped. One reason for the slowing of consumption growth in the GDP numbers for the September quarter was higher oil prices. Now, with oil prices lower, it is hoped that consumption growth too would improve. Short tour of recent economic history [caption id=“attachment_4472763” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] One of the reasons the economy went downhill in the later years of the UPA-II government was the spike in crude oil prices. The price of Brent crude oil moved up from an average of $61.8 a barrel in 2009 to $111.96 in 2012 and averaged $108.84 a barrel in 2013. That led to a steep rise in crude oil imports and widened the current account deficit (CAD) from 2.3 percent of GDP in 2008-09 to a huge 4.8 percent of GDP in 2012-13. It led to a bloating of subsidies, sent inflation through the roof and stunted growth. Yes, there were other factors as well, such as the massive fiscal and monetary stimulus given after the global financial crisis in an effort to boost growth, and also the runaway inflation in food prices. But the high oil prices exacerbated the economy’s woes and made it extremely vulnerable. That is why when the US Federal Reserve resorted to quantitative easing, the markets went into a tizzy and India was one of the worst-affected nations. Foreign investors fled and the rupee plummeted. India was dubbed one of the members of the Fragile Five group of countries. Next, consider what happened between 2014 and 2016. Brent crude prices went down from an average of $98.94 in 2014 to an average of $44.05 a barrel in 2016. It was at a low of $39 by end-March 2016. The extent of the fall can be seen from the fact that the price of Brent crude in 2016 was lower than what it was in 2005. What was the effect? This time, the impact on consumption was muted because the government wisely dismantled some subsidies and increased excise duties on petroleum products. Nevertheless, the rise in tax collections allowed the government to spend more on capital expenditure, even while curtailing the fiscal deficit. Retail inflation in the ‘fuel & light’ category fell from 9.7 percent in 2013-14 to 4.2 percent in 2014-15. The upshot: lower oil prices were a big factor in pushing up GDP growth from 5.5 percent in 2013-14 to 8.2 percent by 2015-16. It is lower oil prices that explain how the economy did well during this period in spite of back-to-back droughts, weak exports, the falling off of investment demand and burgeoning bad loans in the banking sector. In its annual consultation on the Indian economy, the IMF said in March 2016, “Since late 2014, a halving of global oil prices has boosted economic activity in India and underpinned a further improvement in its current account and fiscal positions, and engendered a sharp decline in inflation.” However, GDP growth decelerated to 7.1 percent in 2016-17 and to 6.7 percent in 2017-18. That fall has been attributed to the impact of demonetisation and the introduction of the Goods and Services Tax (GST). But there was another factor at work—a creeping up of oil prices. The IMF’s WEO for October, 2018 said that in 2015 and 2016, the cumulative terms-of-trade windfall gains from lower oil prices for India was 4 per cent of GDP. In 2017, however, the windfall had become a headwind of around 1.5 percent of GDP. And in 2018-19, while the economy rebounded smartly from the disruption of demonetisation and the GST introduction, higher oil prices held back growth. The oil price outlook The good news is that Brent crude prices have corrected by more than 25 per cent from their peak last October despite creeping up recently. They’re still at levels well below the average for 2018. If they remain at these levels or even if they go up a bit further, they will continue to be a tailwind for the economy. The IMF expects oil prices to fall by 14.1 percent in 2019. But there’s a lot of uncertainty—in 2018, the IMF and other agencies had to revise their oil price forecasts many times. The World Bank’s Global Economic Prospects points out, “The outlook for supply is uncertain and depends to a large extent on production decisions by OPEC and its non-OPEC partners. While these producers have agreed to cut output by 1.2mb/d for six months starting January 2019, few details have been forthcoming about the distribution of these cuts, and they may prove insufficient to reduce the oversupply of oil. Considerable uncertainty remains about the full impact of sanctions on Iran once the waivers end, as well as the outlook for Venezuelan production. Meanwhile, crude oil output in the United States is expected to rise by a further 1mb/d in 2019, with capacity constraints envisioned to ease in the second half of the year as new pipelines come on-stream.” On the demand side, lower global growth will weigh on oil prices. Will low oil prices help the NDA government in elections? But even if oil prices remain at current levels, will the government be able to reap the benefits during the elections? That is doubtful for several reasons. One, time is rather short. Any turnaround in the economy is going to take time. Two, as Gaurav Kapur, chief economist at Indusind Bank says, “The government’s fiscal position is, in any case, fully stretched. If it misses the fiscal deficit target, this will be the second year running it has failed to stick to its goal. That makes it extremely difficult for it to administer any stimulus.” Three, the rupee has continued to wobble as foreign investors reappraise their appetite for risk and a lower rupee makes the price of oil go up in local currency. And four, even if economic growth is good, the government’s current preoccupation with giving succour to the farm sector and to small industries shows that some vulnerable sections of the economy are in distress. It doesn’t help that these sectors employ the majority of the population.