International crude oil prices are now down to $40 per barrel from $115 in June 2014. International gold prices are also down from $1300 per once (31.1 grams) in January 2015 to near $1100 now. Economists are busy assessing the impact of these changes on the world economy. However, if we look at it from an Indian perspective, it is bringing good fortune for India.
It is notable that Indian economy had been facing severe crisis in recent past, as GDP growth had slowed down to a very low level (lowest in the last 15 years); and in the process manufacturing was the worst hit, where growth had hit near zero, and was sometimes even negative.
However, when Finance Minister Arun Jaitely presented his central budget for 2015-16, the economic scenario had changed remarkably. The Economic Survey presented before the budget, stated that the economy was at a ‘sweet spot’. The Minister also said that now it&’s ‘India&’s turn to fly’. It is important to know the conditions at work to take the economy out of hopelessness. Changing
The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003, which mandated the government to limit Fiscal Deficit to 2.5 per cent of GDP. However it could be achieved only in 2007-08; it climbed to 5.9 per cent of GDP in 2011-12. In 2012-13, it was brought down to 4.9 per cent and in 2014-15 to 4.1 per cent, both well above the target of 2.5 per cent. In 2015-16, it is expected to be brought down to 3.9 per cent.
If we look at the deficit in Balance of Trade, it was $130 billion in 2010-11, which increased to $190 billion in 2011-12 and to $196 billion in 2012-13. However, it started showing a downward trend and came down to $147 billion and $144 billion in 2013-14 and 2014-15 respectively. Likewise Current Account Deficit (CAD) in balance of payment also declined to $32 billion and $28 billion in 2013-14 and 2014-15 respectively. Therefore, decline in Twin Deficit (Fiscal Deficit and Current Account Deficit) released the stress on the policy makers.
It is notable that excess of both these deficits is bad for the economy; as bulky current account deficit weakens the domestic currency, and high fiscal deficit causes inflation.
Stress on rupee was released to a great extent, with a decline in current account deficit in the balance of payments. The rupee, which had devalued to 68.90 against the US dollar in August 2013, climbed to 62 by February 2015.
It is notable that the rupee which had devalued by 25 per cent improved by more than 10 per cent. It had several benefits; prominent among them was control on inflation. Thus control on CAD resulted is a strengthening rupee and curbing of inflation.
On the other hand fiscal deficit which had reached 6 per cent of GDP in 2008-09, also started receding and by 2014-15, it was at about 4 per cent of GDP. This also helped in containing inflation.
Up to August 2014, international crude prices were at high levels. Thereafter prices started to slide, to $54 per barrel in December and $42 per barrel by mid-August 2015. Gold imports, which had reached $56.5 billion in 2011-12, came down to $28.9 billion by 2013-14.
We import huge a quantity of crude oil; however we also export large quantity of petroleum products, after processing the same in our refineries. Therefore we need to take net import of petroleum products. If we look at net import of oil, we find negative balance of trade on oil at $11 billion in May 2014, which came down to $5.8 billion by June 2015. And if we take balance of oil for 11 months from August 2014 to June 2015, we find it was $66.6 billion, whereas in the corresponding period between August 2013 and June 2014, it was $97.1 billion.
Therefore fall in balance of trade on oil reduced the requirement of foreign exchange; which helped us to contain fast-increasing foreign debt. India thus started moving towards greater self reliance. As a result balance of trade in 2014-15 reached $144 billion and balance of payment on current account to only $28 billion. In the first quarter of 2015-16 (April-June), balance of trade is even lower at only $30 billion. Therefore if the present trend of lower oil and gold prices continues, our balance of trade and balance of payment would further go down.
It is notable that international price of gold which was $1700 per ounce in 2011 is now less than $1100 per ounce. Therefore if we import gold only for ornaments (which is between 300 and 350 tonnes per annum), and price of gold remains at present level, the gold import bill for ornaments would be between $10.6 and 12.4 billion annually. Therefore, the government needs to continue with its efforts to curb import of gold bars and coins.
Though nobody can predict with
precision about future prices, however there is only a scant possibility of increase in oil and gold prices. Recession in gold and oil does not seem to be ending in the near future. Huge supplies are causing oil prices to fall further. Gold prices are going down due to large scale selling of gold by governments of many countries. Therefore we can afford to be optimistic.
(The writer is Associate Professor, PGDAV College, University of Delhi)