Current account deficit and falling rupee are biggest concerns of the Gulf crisis

2 months ago 32

Current account deficit and falling rupee are biggest concerns of the Gulf crisis: Neelkanth Mishra, Member, PM Economic Advisory Council and Chief Economist, Axis Bank, to Karan Thapar for The Wire. ......................................... The Chief Economist of Axis Bank and a Member of the Prime Minister’s Economic Advisory Council says in his opinion the current account deficit and the falling rupee are the “most binding constraints” emerging out of the current Gulf crisis. Neelkanth Mishra also believes that the impact of the Gulf war and the oil crisis could be around 0.7%-08% of GDP growth. He says: “The sensitivity is that about $15 per barrel increase in oil price costs the economy about $40 billion or 1% of GDP. So if you take the average price of $70 a barrel of last year, if the oil price averages $85 a barrel, there’s a 1% of GDP impact. If it’s a $100 a barrel, it’s a 2% of GDP impact.” To paraphrase Mr. Mishra, he went on to say in February or March, before the oil impact was felt, the economy was growing above 7.5%, may be even 8%. If you take an average price of $100 a barrel the rate of growth should have slowed about two percentage points. However, the government has increased its fiscal intervention. In his estimate the cost is about 40-45,000 crores a month which is 0.1% of GDP. This means of the 2% annualized hit 1.2% is being borne by the government. That means 0.8% flowed through to the economy. So the GDP growth rate would have slowed by about 0.7%-0.8% or so. If you want to understand the economic situation facing India and the challenge posed to the economy by the Gulf war and the crisis in the Strait of Hormuz, this is an interview you should watch. To help you, I give below a list of the main questions asked. Here they are:- 1) It’s over 80 days since the Gulf war and the crisis in the Strait of Hormuz began. In your eyes what impact have these developments had on the Indian economy in this period, given that 50% of our oil and 90% of our imported LPG used to come from the Gulf before the war began? 2) What are you most concerned about – the supply of oil and gas, inflation, the current account deficit, pressure on the fiscal deficit or the falling rupee? 3) Against this background, what’s your assessment of the government’s response? The Prime Minister first suggested restraint in terms of usage of petrol, diesel and cooking oil, he asked people to stop buying gold, increase work from home, use public transport and pause foreign travel. How effective are such suggestions likely to be? Or will they be heard and largely ignored? 4) Shortly thereafter the government increased taxes on the import of gold, silver and platinum and increased the price of petrol and diesel by three rupees and CNG by two rupees. Earlier it sharply increased the price of commercial cooking gas. Will this substantially reduce consumption or is that unlikely? 5) The Hindu has calculated (17/5) that oil marketing companies will earn an additional 4,400 crore per month. But it’s believed they are still losing 750 crore a day on petroleum, diesel and LPG. So are further price increases both inevitable and, more importantly, necessary? 6) Yesterday the rupee slipped below 96 to the dollar and the Indian Express has speculated that in a few weeks time it could fall below 100. Should the government use its foreign exchange reserves to shore up the rupee or, instead, as Gita Gopinath says, manage the decline to ensure its not volatile? 7) The truth is foreign institutional investors are pulling their money out of India and have been doing so for a while. Nearly 25 billion has been pulled out since the start of this year, more than in all of last year. This is why the rupee was sliding long before the Middle East war and the oil crisis. Isn’t this what the government should be worried about? 8) Why, when the economy has been growing at 6 and 7% levels, is foreign institutional investment and foreign direct investment sharply declining? 9) It’s not just oil and gas that are badly affected. There’s also fertilizer. What do you foresee as the impact on Indian agriculture this year when, additionally, the monsoon is predicted to be deficient? Will the agricultural growth rate fall? 10) In these circumstances, what do you expect will be the impact on GDP growth this year if the crisis in the Gulf continues for the foreseeable future? The truth is no one knows when it will end. Join The Wire's Youtube Membership and get exclusive content, member-only emojis, live interaction with The Wire's founders, editors and reporters and much more. Memberships to The Wire Crew start at Rs 89/month. https://www.youtube.com/channel/UChWtJey46brNr7qHQpN6KLQ/join

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