Crude management

Crude oil prices are down to the 120-dollar range. There is still uncertainty over Iran. But for the moment, fears about 150-dollar barrels have receded, though India8217;s import basket isn8217;t pure Brent and costs a little less. Implications for India are mixed. First, oil prices have declined because of lower demand and growth in the US and Europe and this lower growth has negative implications for global growth and India8217;s exports 8212; though geographically, India8217;s basket is more diversified now. Second, lower oil prices and speculative movements away from commodities have reversed dollar depreciation and pushed up stock markets, the latter a positive implication for Indian capital markets, since the financial sector is more integrated with the US than the real sector is. Third, these are transient changes and not indicative of temporal trends. The macro problem of sourcing India8217;s energy needs remains. Notwithstanding the nuclear deal, nuclear energy cannot be the exclusive answer.

India8217;s growth projections have been lowered to around 7.5 per cent for 2008-09 and lower growth rates may continue for around three years. This is less to do with oil and more with global cyclical downturns and high interest rate regimes. But once growth recovers to 9 per cent plus, diplomacy must be geared towards successfully sourcing energy supplies, including from neighbouring countries; attempts so far haven8217;t exactly been crowned with success. For the moment, lower oil prices ease pressure on government for hiking domestic prices of petroleum products, though inflationary impact has been cushioned because of restricted pass-through and compensation of oil companies through oil bonds. To that extent, budgetary pressures through implicit not explicit deficits become less. There may be expectations of lower domestic prices for petroleum products. Unless done for populist reasons before elections, this is unlikely, since there still remains large gap between what prices should be and actual prices.

The broader conundrum of reforming the administered price mechanism remains, since future investments in the sector are also constrained by lack of liberalisation. The UPA is unlikely to address that problem. Unless global crude trends are reversed, the government has lost a scapegoat for mismanaging the economy.