Monday, December 07, 2015

Without oil price fall, India's GDP growth would be 6%, not 7.5%, argue World Bank, JP Morgan economists

By Our Representative
A recent World Bank analysis, even while predicting that India’s growth rate would be around 7.5 per cent by the end of the present financial year ending March 2016, believes that it is largely “oil-fueled.” Carried out by Frederico Gil Sander, senior economist, World Bank, it says, “The drastic decline in global crude oil prices since June 2014 clearly played an important role”.
“As a net oil importer, the halving of oil prices has been a bonanza for India. External vulnerabilities were greatly reduced as the lower oil import bill shrank the current account deficit despite anemic exports”, says Sander.
He adds, “Lower oil prices also helped contain prices of global commodities, and along with the Reserve Bank of India’s (RBI’s) prudent monetary policy led to a significant decline in inflation.”
Quoting an “interesting” piece, which also points towards this phenomenon, Sanders quotes economists of the top rating agency JP Morgan’s Sajjid Chinoy and Toshi Jain who “estimate that India benefited from a 2.1 percent of GDP terms-of-trade shock over the last four quarters, two-thirds of which have been spent, which implies a 1.3 percentage-point fillip to GDP growth in the previous four quarters.”
In an opinion piece in a prominent business daily, Chenoy argues, “What this suggests is that after netting out the oil impact, underlying growth may have been closer to six per cent, reflecting the export slowdown and rural stress.”
Answering the question, “Why does this matter?”, Chenoy insists, “Because this is a one-time 'growth' windfall, if oil prices stabilize… there will be no incremental 'growth' impact through progressively higher purchasing power or corporate margins.”
Chenoy’s believes, “In all the discussion about India's growth performance and prospects, the elephant in the room is barely discussed. Growth sceptics worry about a sluggish global economy and a struggling rural economy. Growth optimists point to the government's reform efforts and the impact these will eventually have on the ground.”
“What's surprising about this debate”, he says, is that nobody talks “about the most significant driver of growth in India over the last year: a massive, positive terms-of-trade shock in the form of lower oil prices that has boosted activity.”
Elaborating, he says, “India is a very large commodity importer, in general, and oil, in particular. So when oil prices collapse from $110 to $45, economic agents in India experience a large income windfall: resources that should have been transferred to the outside world are now retained by households, corporates and the government”, leading to GDP growth.
“To the extent that some of this income is consumed or invested rather than saved, it translates into higher economic activity and growth”, Chenoy says, going over to a complex exercise of explaining how this happened, and what would be the impact on the Indian economy in the near future.
Calling it an “uncomfortable reality”, the rating agency economist believes, few have seen that “growth has benefitted significantly – over a percentage point – because of the collapse in oil prices. That will soon go away, if prices stabilise. And other drivers of growth will need to quickly step up, if a slowdown is to be avoided.”

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