Mumbai: It is no secret that the Indian economy is hostage to the gyrations in the global commodity markets. Rising commodity prices create stress. Inflation goes up. The trade deficit widens. The rupee comes under pressure. Falling commodity prices bring relief on all three fronts.

There are implications for economic growth as well. High commodity prices cut domestic purchasing power while low commodity prices add to it. The most significant commodity in this context is oil. Indian economic stability is often hostage to what happens under the hot Arabian sands or in the air-conditioned rooms where the global oil cartel meets.

The international terms of trade—or the ratio of the price at which a country sells to the world to the price at which it buys from the world—are thus a key concern for Indian policymakers. India’s import basket is dominated by commodities while Indian exports have significant manufactured items such as engineering goods, textiles and pharmaceuticals.

There are two special cases as well. Part of the oil import bill is to feed domestic refineries that export their products. The export of jewellery is based on imports of pearls, precious and semi-precious stones. The India's balance of payments is also supported by software exports as well as NRI deposits.

A new database created by two economists at the International Monetary Fund (IMF) puts a lot of this into perspective. Bernard Gruss and Suhaib Kebhaj have created a database of the commodity terms of trade for 182 countries from 1962 to 2018. India is one of those countries. They have used data on 45 commodities—including gold—to create indexes of import prices, export prices and terms of trade. Their database provides information on commodities rather than merchandise trade as a whole. So, for example, the import and export of machines or cars or garments are not part of the database.

India is a net importer of commodities, so the trends in global commodity prices are especially important. The second chart here shows the index of the price that India pays for its commodity imports, including oil. The weights in the index depend on how important a particular commodity was in a particular year. The third chart shows the movements in the net export prices since 1962, or the difference between the price of commodities a country exports and the price of commodities it imports.

These charts together give a good sense of how the commodity terms of trade moved for India—and the economic impact. Some of the periods when commodity import prices went up sharply coincide with moments of intense domestic stress—from the political unrest after the first oil shock of 1974, the need to go to the IMF for a lifeline after the second oil shock of 1979, run on the rupee in 2013. There were also benign periods such as the 1980s. It is interesting that the deterioration in the terms of trade was relatively modest before the 1991 crisis.

The other interesting period is during the synchronized global boom between 2004 and 2008. India saw its commodity terms of trade deteriorate. Yet, the Indian economy was in fine fettle because the effect of higher commodity import prices on the balance of payments was negated by a splendid export performance.

This is what distinguishes India from China. The latter also has a trade structure dominated by commodity imports and manufactured goods exports. Its commodity terms of trade also deteriorate in a broadly similar way. Yet, it has been less prone to topple over when terms of trade deteriorate because its exports are robust.

Competitive exports insure China from global commodity shocks to a great extent. For India, they represent the insurance missing in its economic structure right now.

Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute.

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