DC Edit | Amid Global Shocks, India Must Revitalise Middle Class
High oil prices, rising inflation and global risks put India’s economy under fresh pressure
For nearly one month, crude oil price has remained above $100-barrel, testing India’s economic resilience and drawing attention to the country’s precarious dependence on foreign countries for its energy needs. Apart from affecting people at fuel stations, costly crude oil prices affect them through higher transportation costs and higher inflation.
India imports close to 90 per cent of its crude requirement, making sustained increases in international prices particularly damaging. While the oil price remained comfortable till August, the escalation of US-Iran tensions and the recent attacks on Saudi Arabia by Houthis, a Shia Islamist terrorist organisation, kept the crude oil above $100 for almost the entire September.
Though India managed higher crude oil prices through discount shopping in Russia, the country’s crude import bill reportedly jumped 48.4 per cent to $74.8 billion during April-August. The cushion that discounted Russian crude has provided India earlier has also largely disappeared. Russian oil, which at times was available at discounts of $10 a barrel or more, has recently been sold to Indian refiners at around parity with, and occasionally at a premium to, Brent.
Higher crude oil price means higher transportation cost, which will have an inflationary effect on all prices. Since April, inflation has been on the rise steadily — 3.48 per cent in April, 3.93 per cent in May, 4.38 per cent in June, 4.45 per cent in July and 4.82 per cent in August.
Though the inflation is still within the Reserve Bank of India’s target of four per cent with acceptable movement of plus or minus 200 basis points, the price scenario remains a grave concern for the policymakers. This will be one of the prime concerns that would be discussed by the RBI’s Monetary Policy Committee, whose three-day meeting is underway now.
Individually, India may manage the higher fuel price as it has been doing for some time through discounted Russian oil. However, the country is confronted by two more economic problems, whose roots are overseas — rising yield on US treasury bonds and isolationist policies by advanced economies, especially the United States.
Together, they create an uncomfortable combination of imported inflation, pressure on the rupee, deterioration in the current account, a weaker rupee and higher domestic interest rates — the result is once again higher inflation. Companies may initially absorb some of the increase, but prolonged high prices inevitably get passed on to consumers.
All these are external problems over which neither the RBI nor the government have little control. The RBI may increase repo rate, which could address yield differential between the US dollar and rupee. But it cannot bring down crude prices, end geopolitical conflicts or improve global trade.
The government, therefore, needs to revitalise the Indian economy. Though the economy is growing on paper, it is said to be greatly contributed by premium products by affluent sections. India’s real strength was its middle class, which is languishing in debt in the wake of a multi-year freeze on salary hikes. Rising profits of companies that don't invest back cannot revive the economy. A part of profits must flow to direct and indirect stakeholders, only then the economy will get back into overdrive mode.
