Taking Advantage of Lower Commodity Prices
By focusing on those industries that rely on oil as a production import, India can take maximum advantage of falling global commodity and oil prices.
The biggest headlines in the economic world over the past year has been news of slowdown in the Chinese economy and the resultant fall in commodity prices. The slowdown in China, which has been the engine of growth in the past decade, has had significant impact on most other economies. China has been the biggest consumer of commodities and oil and thus, a slowing Chinese economy will import lesser amounts and this reduced demand leads to a fall in prices. Commodity prices have fallen by over 40% since their peak in the early part of this decade. Apart from oil, copper, iron ore, zinc, and many metal prices have been declining consistently. Price of energy related commodities, such as coal, has also significantly dropped. The reduced prices have hit many commodity and oil exporting countries. Brazil, Russia, South Africa and many other emerging markets have had severe declines in their exports and consequently in their GDP growth.
How is India poised? Is it going to be hurt by the Chinese slowdown or can it be a tailwind to increase growth?
First, the negatives: Indian apparel and yarn exports have declined considerably. China has been a big importer of Indian textile products and its decreased pace of income generation has meant lesser demand for Indian exports. Further, with China devaluing its currency considerably as a means to improve their trade, Indian competitiveness has been further eroded. India’s exports have fallen in every single month from April to November 2015 in comparison with the same month a year ago.
However, with India being a net importer of oil and commodities, it should really focus on taking advantage of the lower global commodity prices and falling oil prices. Here’s a few things that India can focus on:
1. With oil prices set to decline further in the first half of 2016, this is the time for India to seriously consider building a large enough strategic oil reserve.
2. India should get its current account balance in line. The rupee has also been declining significantly and if India can increase its exports, and with a reduced import bill, the current account deficit can be corrected to an extent.
3. Lower oil prices will imply smaller oil, petroleum and fuel based subsidies. This should be a golden opportunity for the government to get its fiscal accounts in check.
4. A lower import bill will also have positive effects on inflation and inflation expectations. This should give more room for a more accommodative monetary policy.
5. Most importantly, the government should focus on those industries that uses imported material, commodities and oil, as raw materials for production. The Indian auto industry should get a considerable fillip due to lower input prices. If policy can be more accommodative, the auto industry can soar. Other industries that rely on oil, such as, plastic industries including pipes, chemicals and resins selectively, paints, footwear manufacturers etc can really benefit from oil prices and the government should focus on creating a friendly climate for these industries. Apart from oil, reduced price of iron-ore, copper and even coal should help a large number of Indian industries by lowering input costs.
6. Finally, since India’s nearest peers — Brazil, China, South Africa, and many other EMs — not faring well in terms of economic opportunities, it is poised to receive a lot more of global funds, both FII and FDIs. The next round of liberalising reforms cannot come soon enough to attract global capital into India.
After the stagflationary episode in 2010–12, India is finally getting back to the higher growth track and global conditions seem to be favouring India. It should do all that it can to take advantage of these conditions and accentuate the positives.
Anupam Manur is an economics Policy Analyst at the Takshashila Institution. Connect with him on Twitter @anupammanur
