Rise in Oil Prices and its effect on the India Economy

Introduction

India is a developing country but it is a rapidly growing economy. Its economy is the 11th largest in the world and the 4th largest by purchasing power parity. Even though India is still suffering from poverty, illiteracy and corruption its prospects are fair as it has made significant progress after free market principles were initiated in 1991. It has had achievements in globalization and the countries per capita GDP was listed as 127th by the International Monetary Fund (IMF) in 2010 with $3290.

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By 2008, India established itself as the 2nd fastest growing economy with economists talking about it becoming one of the world’s super powers of the future. India is one of the BRIC countries (Brazil, Russia being the rest of the quartet) because of its economic growth and prospect of improving global economic conditions. From the years 1947 to 1991, the policy that governed India’s economy was socio-democratic; the country was severely regulated, had pervasive corruption, declining growth and more public than private ownership. However, since 1991 the country has experienced liberalization and more of a market-based economy. India had stepped up to the 21st century with improved reforms and enhanced economic policy.

Unfortunately, India, like other countries around the world, was not immune to the financial crisis of 2007 to 2010. The economy was crippled with the effect of the economic downturn in addition to a poor season of monsoon that India’s climate faces annually. India’s GDP fell drastically to 6.7% in the period 2008-2009 but experienced a small climb of relief to 7.2% in 2009-2010. The fiscal defecit also rose from 5.9 to a soaring 6.5% at the same time. The country’s account defecit was elevated to 4.1% of its GDP during the 2nd quarter. According to the Labour bureau its unemployment level was significant at 9.4% and more than 10% in rural areas where more than a billion Indians reside.

Economic History Brief

The economic liberalization of India is ongoing as there are current reforms. Independence from the British was achieved in 1947 and India stuck to socialist policy, then during the 80s the Prime Minister Ragiv Gandi started some reforms which were break through ones that allowed international trade and investment, deregulation, privatization, tax movements and controlling of inflation that was needed. Political ruling has not affected the direction of liberalization; no mater what the ruling party the main objective of the government is to improve labor laws and reduce agricultural subsidizing. The objective is to improve economic growth and move to a capitalistic, industrialized nation. This is thought to be for the good of the citizens.

One of the hardships that India faces is poverty but 2009 it was estimated that more than 300 million people have escaped poverty. Liberalization has proved to be beneficial to the economy and in 2007 the proof was when India recorded its highest ever GDP growth rate of 9%. After China, India is the fastest growing economy in the world. The Organisation for Economic Co-operation and Development (OECD) report said that average growth rate will double the average income in ten years and more reforms would accelerate it. The government strategies have included more liberalization movements. India grows at a slower pace than China which has had more experience with reforms since 1978. One author, McKinsey states that it is imperative to remove main obstacles to change which would free up the economy to grow just as fast as China’s at 10% a year or more. India was also ranked 124th amongst 179 countries in the Index of Economic Freedom World Rankings which is an improvement over the prior years.

However the government has not left everything to chance. It has been monitoring the effect of the global economic slowdown repeatedly and taken note of the employment situation in India since 2008. There were six quarterly surverys in the chosen sectors such as the textile industry, metals, stones and jewelry. Automobiles, transport, leather and handicrafts were also surveyed. The problems were that employment decreased by 0.4 million during the quarter October-December 2008, it increased by 0.3 million during January-March, 2009, declined by 1.13 million during April-June 2009, increased by 0.49 million during July-September 2009, increased by 0.438 million in quarter October-December 2009 and increased by 0.016 million during January-March 2010. This shows that approximated employment in the sectors had experienced a net addition of 8.15 million during the period of October 2008 to March 2010.

A statement of sector wise changes in employment is here:

Sl. No.

Industry / Group

Changes in employment during the quarter (in Lakhs)

Oct – Dec,

08

Jan – Mar,

09

April – Jun,

09

July – Sep,

09

Oct – Dec,

09

Jan – Mar,

10

1

Mining

(-) 0.11

NC

NC

NC

NC

NC

2

Textiles including apparels

(-) 1.72

2.08

(-) 1.54

3.18

0.16

(-)1.19

3

Leather

NC

(-) 0.33

0.07

(-) 0.08

0.09

0.00

4

Metals

(-) 1.06

(-) 0.29

(-) 0.01

0.65

0.23

0.04

5

Automobiles

(-) 0.83

0.02

0.23

0.24

0.06

0.29

6

Gems & Jewellery

(-) 0.99

0.33

(-) 0.20

0.58

0.07

0.24

7

Transport

(-) 0.96

(-) 0.04

(-) 0.01

0.00

(-) 0.02

(-)0.02

8

IT/BPO

0.76

0.92

(-) 0.34

0.26

5.70

1.29

9

Handloom /

Powerloom

NC

0.07

0.49

0.15

0.09

(-)0.05

Overall -All the above Sectors

(-) 4.91

2.76

(-) 1.31

4.97

6.38

0.61

The years 2009 and 2010 were tough years for India due to the impact of the global financial crisis. India benefited from its strong economic and financial fundamentals but still succumbed to the inevitable impact. On the other hand, while the rest of the world’s economic growth were negative, India still had a modest growth rate at an estimation of 7.5.

Productivity and Inflation in Brief

To make this clear we need to look at the industrial production sector. The government figures show that production was slowed to 13.5% in march in comparison to 15.1% in the previous month. In actuality, the industrial sector showed a 10.4% growth in the year with just 2.8% in the previous fiscal year. The jump is large considering the extreme impact of the downturn. This was probably due to the government fiscal and monetary policies that kept India afloat as well as injecting both sides of demand and supply.

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The monsoon did not do much for the agricultural sector and it fared far worse with 22% less rainfall in 2008. There was a severe decline in grain production which is important for the economy of India, being one of its exports. There was a rice shortfall of 7% but despite the climate being poor there was a record wheat output. The shortage of rice and cereals would decrease the output to 218 from 229 mt. predictions of the next monsoon show that it will be timely; this is good news for India’s agricultural sector. Kerala is one of the states which will benefit from this.

The news for the exporting sector is both positive and negative. There was a big fall in exports which led to the expected job losses and the decline in foreign exchange earnings. The good part is that even though the export industry was weak it did its best to support itself against the harsh economic climate and battle through. Export have had a constant increase and there has been a 54% increase in March in 2009. The trade figures released by India’s government indicate a deficit of 4.7 % in 2009 to 2010. The total exports stand at $176.5 billion but there is a problem of the negative impact of the appreciation of the rupee which might impact trade as it affects India’s competitive place globally.

The good part is that imports fell by 8.2 in 2009-2010 on a year on year basis standing at 278.7 billion dollars. Compared to the previous year the trade shortfall came down to 102 billion dollars from the 118 billion dollars of 2008. There is now an export target sent by the Ministry of Commerce of 200 billion dollars for the fiscal year.

High inflation has been the worst sort of problem as it increases drastically it affects the employment levels and trade levels. Inflation is expected to increase to 19%. The finance minister Shri Pranab Mukerjee addressed the national conference on implementing a program of growth and development and how even higher levels of growth has no advantageous results on some of the lower rungs of society who are struck by poverty and are yet to feel any impact from economic growth. There is such a great disparity in fiscal wealth. He was confidant that with the better monsoon season on its way that food inflation would decrease and have a beneficial result on all industries, especially the agricultural industry.

In April of 2009, inflation was not as severe at 9.59% as it was much higher n march and even though it was said that inflation would fluctuate in the coming months, the government was steadfast in its objective to bring down the rate to 5.5% by the end of the fiscal year

The incentive packages given by the government during 2008 to boost demand did help the economy but also contributed to inflation and the fiscal deficit. The reserve bank started liquidation regulations with repo and reverse repo rates and the cash reserve ratio but no major steps were taken. In 2009 the world Economic Outlook projected India’s GDP growth to be 8.8 % in 2011. the government is planning on having even better results in the future by implementing the right policies, having good climate and providing timely action to any bad luck .

http://news.bbc.co.uk/2/hi/business/7421778.stm

http://profit.ndtv.com/news/show/fm-rising-oil-prices-a-matter-of-concern-govt-to-tackle-situation-139025

Rise in Oil Prices and its effect on the India Economy

The soaring price of oil is having a major influence on India’s economy. India spends a lot of money financially supporting its citizens with fuel every year. Petrol in India is a lot cheaper than it should be. However, Oil firms in India are still buying oil at international market value. Therefore, Indian oil firms are hemorrhaging money at $100 million a day. There will be more difficulties faced if the price increases any further. It is understandable that the government is receiving complaints to raise the price of fuel by the oil companies but politically it is an unfavorable thing to do as members have to win election votes.

The political disturbances in the Middle East recently due to Egypt and other countries has increased anxieties of the Finance Minister who has to smooth over conflicts for the home consumers. The question about oil production and availability has led to rising apprehensions. The minister spoke out about the situation saying they were in touch with the Petroleum Ministry and would take steps to settle the undesirable effect of high energy costs on the public. His reasoning was that when prices reached $147 a barrel that they managed the situation. Political turmoil in Egypt has resulted in crude oil prices going past 100 dollars a barrel which has led to the outcome of prince increases in all major oil importing countries like India. High global oil prices increase the government funding bill and broaden the trade decrease as India starts importing much more than it exports. India already imports three quarters of its fuel needs. State run firms like Indian Oil, Hindustan Petroleum and Bharat Petroleum will bear the brunt of severe revenue shortages. In 2010-11, the under-recovery of oil firms is estimated to exceed Rs. 700 billion leaving the government to pay the rest of it as a subsidy. In 2010, government put in fuel reforms by deregulating petrol prices and raising prices of diesel, kerosene and LPG to cut its subsidies and fiscal losses. The Empowered Group of Ministers delayed a key decision on diesel price deregulation due to the high global price of oil and high inflation to 8.4% in December from 7.5% in November.

Read more at: http://profit.ndtv.com/news/show/fm-rising-oil-prices-a-matter-of-concern-govt-to-tackle-situation-139025?cp

The diagram below illustrates what is happening to oil prices around the world. Recent events of political unrests caused a sharp decline in the global supply of oil. This reduction can be illustrated by the inward shift of the aggregate supply curve from AS1 to AS2. This shift causes a ‘negative supply shock’ and increases the equilibrium price from P1 to P2. The increase in price has had a negative impact on all oil importing countries like India as see above.

Conclusion

Since the past couple of years, India has maintained steady and rapid development and has infused vigor into global economic growth. The world will be a big factor in its coming improvement as India will not be able to progress without it. In approximately twenty years India will make historic inputs into development of the global economy by expansion of foreign trade and expansion and development in the west. It will improve its overseas investor relationships and have better business outlooks. Overseas investments will have to be guided and supported by competitive businesses and have to complete complex types of economic and technological collaboration with improved quality and benefits for both organizations. India will also have to diversity and increase its bilateral, multilateral and regional economic assistance so they can have mutual development and a global strategy in all countries and regions around the world.

India’s economy has enjoyed sustained progress in recent times, being one of the BRIC countries. India’s Central Bureau of Statistics released that GDP grew by 8.8%, for the highest quarterly growth since 2008. In comparison to the global economies, India’s has had a nice steady momentum with less fluctuations. India’s information industry has been the cause of rapid improvement with developments in language and human talent. The service industry has taken leaps and attracted many investors, therefore leading to the manufacturing industry getting less focus. India’s government has also had encouragement endeavors that have promoted growth.

There are still many hurdles to face before India’s economy can reach greater heights. Economists say that there will be great progress as well as many challenges in the future. The government, especially has to start successful policies to cope with any downfalls. The most crucial problem faced by the government at the moment is current inflation due to an exponentially expanding economy. Only the passing of time can say how India’s economy will adapt to the increasingly bleak global economic climate.

Conclusion – http://ezinearticles.com/?Current-Economic-Situation-of-India&id=5327969