CRUDE COULD STALL GLOBAL GROWTH ENGINES

“We face the most serious recession of our lifetime” said George Soros, the man who broke the Bank of England. In short, his feeling is that the United States and Britain are facing a recession of a scale greater than the early-1990s, greater even than the 1970s. With crude at US $ 135, we have no reason to disagree with Soros. Already Yankees remain the world's biggest consumers (also polluters) and have a strange fetish for everything big-from Big Mac to the giant Limousines. I might sound like a grand old Green Nanny but its the bitter truth. Already unrelented spending has left US with a huge fiscal deficit which has played a crucial role in tumbling of the dollar. Sub-prime mortgage crisis and the subsequent FED rate cut by 3.25% has made the problems worse for the dollar. This contagion can spread to markets all over the world.

Weakness in dollar has seen the prices of crude oil and other essential commodities skyrocketing. This spike in metal and food prices has caused food riots in several countries; something the world had not heard for last few years since promethean growth of the developing world in the last few decades.
However the source of worry continues to be crude oil. Its one major factor which can bring the world economic growth to a grinding halt in coming decade. f Arjun Murti of Goldman Sachs is to be believed we are already on our way to see crude trading at US$200.One wants but cannot ignore them. They were the ones who predicted crude at US$100 per barrel while we just ignored them as doomsayers.

India imports about three-quarters of its crude oil, and our oil bill accounts for a third of the total value of all imports. India's crude basket stands at US$120 which is extremely high. Rupee has begun to weaken against dollar adding to our inflation woes. With inflation hitting 8.1 per cent (actual figures could be as high as 10 per cent!) bad news seems to be coming from all fronts In such an environment how will the big companies & SMEs (small and medium enterprises) survive. Their margins could suffer so would their expansion plans as interest rates are already too high and may not soften in near term. This slowdown was reflected in recent IIP nos. which put down growth at 3% as against 8.6% in Feb'08.Even FY'08 industrial growth was lower at 8.1% v/s 11.6%in FY'07.These poor stats are enough for the entire country to sit up and take notice.

Crude prices may not decline to desired levels in near term and will definitely hit the profit margins of every business in the country. Record wage hikes we have seen in past few years could become a story of the past. This could bring down the consumption of various products mainly consumer goods, automobiles and real estate. Real estate companies are already feeling the heat as is reflected in their share prices which have taken the worst beating.

Government too is in a strange dilemma. They don't want to be seen doing nothing specially when there are assembly elections in key states. General elections too aren't far away either. Oil PSUs will continue to bleed as they will be sacrificed at the altar of aam-admi politics. But this move will backfire as their capability to secure crude oil and oil blocks abroad for future will take a beating thus endangering our oil security. Already our desperate politicians are taking steps, which they should avoid, like banning futures trade in few commodities and curbing steel price hikes. However everything may not be over as of yet.Q4 GDP growth for India stood at 8.8% slightly higher than expected 7.93%.

Inflation could come down if we get a good monsoon and a bumper crop thereafter. These are tough times for economists, Government and common man alike. Macro picture for India doesn’t look all that bright either. During the fiscal years 1980-81 to 1990-91, the average GDP growth rate was 5.38 per cent (Source: Handbook of Statistics, RBI). In comparison, the average growth rate between 1990-91 and 2006-07 was 6.23 per cent, an increase of less than one percentage point. On the other hands reforms in China have put it on a double digit growth trajectory. Agricultural growth decelerated from an average of 3.39 per cent in the pre-reform period to 2.77 per cent. Even the industry didn't really do too well. The average growth rate was lower by nearly 0.57 per cent, as it decelerated from 6.72 per cent to 6.15 per cent. The saving grace, not surprisingly, was the service sector as its average growth rate increased by more than 1.48 percentage points, from 6.33 per cent to 7.81 per cent. In fact, had it not been for the service sector, reforms would have earned the dubious distinction of having pulled down the economic growth of India.

India's deficit is the highest among those in major emerging markets and about 2-3 times that of major developed economies as a percentage of GDP. This deficit has constrained government's spending on productive areas such as infrastructure, education, health and welfare .The government's average annual development expenditure growth rate plummeted by more than 6 percentage points, falling from an average 15.97 per cent during 1980-81 to 1990-91 to an average of 9.75 per cent during the post-reforms period.

High growth, recorded during the last few years, seems to be more cyclical in nature than structural. Strong global growth, benign inflationary situation and ample liquidity sloshing around caused by a loose monetary policy, both globally and in India, led to this strong growth. With the American economy slipping into recession and inflation becoming a major concern world-wide, India is on the verge of a slowdown. We are now seeing the decoupling theory giving way to the 'recoupling' theory. India does not seem to have reached a stage where continued high growth will not trigger inflationary pressure, unlike China which sustained a scorching pace for a much longer period of time on the back of clearly improving productivity. India does not seem to have gained much by way of improving productivity that would have ensured sustained high growth. A mere five-year-long high GDP growth is seemingly choking the economy via inflation.
Productivity is showing little signs of rising as agriculture sector continues to be a laggard with investment remain at historical lows. Industry continues to suffer from infrastructural bottlenecks. Higher cost of credit will slowdown their expansion plans. SEZ policy is yet not clear. Road and port modernization is behind schedule. Corruption and red-tapism makes things worse. Quite naturally, India ranks a dismal 120 (despite improvement) in the list of 178 countries ranked by World Bank in terms of the best places to do business. So high inflation may continue for some time to come and its time we brace ourselves for a long battle against it.