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Barrels instead of trains

Barrels instead of trains
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First Published: Mon, Apr 04 2011. 12 48 AM IST
Updated: Mon, Apr 04 2011. 12 48 AM IST
It is amazing how some things continue because of lazy thinking and inertia. For 50 years, the government of India presented the Union budget in the afternoon, following the British precedent. The Brits did it for a good reason: the India budget came just in time for the London equity market. Only when print journalists, under threat from TV news channels, started complaining about not being able to do justice to the budget documents did Yashwant Sinha in 1997 change the timing to 11am.
The railway budget is a similar anachronistic animal. From 1925 onwards, the British presented it as a separate budget to ensure that the railways got adequate importance, mission-mode execution, and assured project financing. The railways, without doubt, was the single largest investment that guaranteed British political and military control over India. It accounted for one-third of the overall British budget.
In the current lexicon, the railways is a public enterprise, organized, financed and controlled like any other government department. What political, economic or military reason justifies the railway budget now?
The most critical strategic issue facing the economy now is the access to natural resources. Rising costs of raw materials and problems with their availability constitute the biggest threat to India’s medium- and long-term growth, and to fiscal stability.
The 2011-12 budget was squarely criticized for underestimating the oil subsidy bill. This one subsidy figure made the edifice of budgetary numbers collapse. At current levels of supply and price, the oil subsidy is too big to finance. The sooner this is realized the better. The ability to reduce duties on petroleum goods to an extent that could cushion a further rise in the import bill is also limited.
The extant and emerging political situation compounds this “resource deficit”, which is the biggest threat to sustained 9% growth. If the problems in West Asia and North Africa (WANA) continue, as they will, commodity prices will move to a level where they will constitute a good and proper supply shock that will impair growth.
Take oil alone. At the present rate of growth, net oil imports in 2011-12 are likely to be 770 million barrels of crude. If the average price is $110 per barrel, India’s import bill will go up by $20 billion. And it is not just the fiscal situation that is vulnerable to oil prices. Higher crude prices also mean a worsening current account deficit. With this kind of dependence on imported crude, the India macro story becomes an inter-play between the twins—fiscal and current account deficits, or internal and external imbalances. Though the fiscal deficit is more manageable now, the current account deficit remains a huge worry.
In addition to the macro front, crude prices will affect corporate earnings. This, along with the hardening of interest rates, will hurt profits.
Apart from the regular input logic, oil prices also have a huge impact on manufacturing, since high prices set off a chain reaction that propels exploration et al, thereby creating huge upstream activity. As a result, steel will be under pressure for a couple of quarters, but then will see a great increase in demand.
Besides the fiscal, macro, corporate earning and manufacturing activity aspects, food and oil prices bear a correlation as food production gets more energy intensive.
The continuance of oil prices on current trends will have international implications for India’s growth too; one big development could be that China may be forced to slow its economic growth. At these levels, the arithmetic of growth and trade just doesn’t add up in China.
Rise in oil prices will also redistribute money across countries; members of the resource-rich but hugely underdeveloped WANA region will be sitting on a pile of cash surpluses that they will need to deploy somewhere. Could there be an opportunity here?
The current WANA troubles aside, the overall situation in the commodity markets the world over is worrisome. It is now beginning to take geo-political overtones. In these days of post-meltdown nervousness, when protectionist murmurs haven’t quite died as yet, this situation can quickly get out of hand.
In this context, a medium-term energy security strategy needs to be formulated. The raison d’etre for the oil budget is that the key for ensuring economic stability and sustained growth over the next decade lies in how well India’s energy economy and security are managed. All pure play public investments, those in partnerships with the private sector, a counter-cyclical (in relation to prices) taxation policy, systemic support to the private corporate sector to shop abroad for resources, and an enabling policy is what the oil budget should be all about.
Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice.
Comment at haseeb@livemint.com
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First Published: Mon, Apr 04 2011. 12 48 AM IST