Indian growth may suffer on account of higher commodity prices this year
Commodity prices have plunged recently, with the Bloomberg Commodity Index down almost to August 2016 levels.
Why is that a big deal?
For answers, look at the chart alongside.
Extracted from the International Monetary Fund’s (IMF’s) World Economic Outlook, it shows how windfall gains or losses from terms of trade have affected the gross domestic product (GDP) of nations.
The chart shows India has been one of the key beneficiaries of lower commodity prices in recent years.
In 2015, lower oil and commodity prices led to windfall gains of as much as 3.6% of GDP, while in 2016 the gain was a much more modest 0.6%.
GDP growth in 2015 and 2016, therefore, received a boost from lower commodity prices. In 2017-18, however, these gains are expected to reverse as commodity prices rise.
IMF predicts if commodity prices remain at around the level they were at last August, then the terms of trade losses for India will be 0.51% of GDP; but if they remain at the more elevated levels they were at in January, the loss would be to the extent of 0.64% of GDP.
South Korea, Pakistan and Thailand would be even bigger losers than India as a result of higher commodity prices.
Conversely, commodity-exporting countries such as Saudi Arabia, Kazakhstan, Iran, Nigeria and Russia, which saw their GDP growth decimated in 2015 and 2016, are now likely to see a boost to their GDP due to higher oil and commodity prices.