The other determinant of economic growth
R. K Pachauri
While the Indian economy will benefit by the tailwinds of monsoon rains, attention has not been provided to another godsend for the country, which has been beneficial of late – the downtrend in global oil prices.
There is considerable optimism on India’s economic growth this year with the monsoon matching the bright forecasts of rainfall across the country. Fortunately, weather forecasting in this country has become much more reliable in recent years with the Ministry of Earth Science and its leadership having brought about significant improvements in forecasting skills and expertise within the Indian Meteorological Department (IMD). As a result, there is general acceptance of IMD forecasting 106 per cent rainfall based on the average of 89 cm aggregated over the period 1951 to 2000. Regionally, too, the disparities that created drought conditions in large parts of Maharashtra, for instance, are likely to get corrected this year, because the worst affected parts of that State in the Marathwada region are projected to get relief this year with adequate rainfall.
It is not surprising that in a country where the well-being of the people has traditionally depended on agrarian activities, the monsoons show psychological dimensions which have been romanticised in the literature, our folklore and even in music and song in different parts of the country. Political fortunes of people and political parties are determined so often by the success or failure of monsoon rainfall.
To that extent this year’s generous rains bring good cheer not just to the Government but also to business and industry. Rural incomes are now an important determinant of the market not only of agricultural inputs like fertilisers, seeds, farm implements, tractors and irrigation systems, but also a range of consumer goods ranging from electronic goods to potato chips. Good monsoon rains are, therefore, a godsend for the country as a whole.
While these rains are important for the country’s agriculture, which contributes approximately 16 per cent to India’s gross domestic product (GDP), significantly about half the population of the country depends on income generation from agriculture for its livelihood.
While the Indian economy would benefit overall by the tailwinds provided by monsoon rains, attention has not been provided adequately to another godsend for the country, which has been of great benefit in the past two years – the downtrend in global oil prices. This has resulted in a decline in foreign exchange expenditure on oil imports in the last fiscal year to half the amount in the previous year.
India’s import of crude oil amounted to 202.1 million tonnes in the fiscal year that ended March 31, 2016 costing the country $64.4 billion as against $112.7 in the fiscal year 2014-2015. While monsoon rainfall is a gift of nature for India, decline in oil prices which have unexpectedly benefitted the country’s economy, cannot be classified in the same category. Decline in oil prices globally have come about as a result of the downturn in the global economy, a perceptible shift to natural gas in North America, a shift away from fossil fuels to substitutes accompanied by increase in energy efficiency in China, and changes in the structure and technology of oil supply.
All of these have led to a precipitous decline in the price of oil in the global market, with major benefits for large importers like India. But it would be short-sighted to believe that these conditions are here to stay. India has suffered in the past as a result of sharp increases in the price of oil, such as in the aftermath of the first oil crisis of 1973-1974 when prices in the global market quadrupled within a few days. The Indian economy was ravaged as a result, and inflation reached about 23 per cent in that year, according to analysis carried out for that period by V Pandit of the Delhi School of Economics.
The social and political consequences of this development were devastating, and were clearly a factor in the extensive unrest that was witnessed and political developments which ultimately led to the imposition of Emergency by Prime Minister Indira Gandhi.
Any such sudden increase in oil prices any time in the future is highly unlikely as is the massive increase in inflation that occurred then. But, given India’s growth in oil imports, the vulnerability of the Indian economy to a large increase in oil prices would rock the economy unless efforts are made to move the country away from increasing dependence on oil. This should be part of an overall strategy to reduce emissions of carbon dioxide in keeping with the agreement on climate change reached in Paris last December.