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External pressures on price front may ease

The challenge of soaring crude prices has become formidable. The assertion of worldwide inflationary pressures as a result has had a debilitating effect on many developing countries.

There has also been hectic speculative activity in the commodity and bullion markets. The weaker oil importing countries find it difficult to finance the high cost imports.

The speculative activity as averred by members of the Organisation of Petroleum Exporting Countries (OPEC) was mainly responsible for the surge in crude prices to $ 147 a barrel in July.

It was even feared that prices may touch $ 200 a barrel, as there was no shrinkage in demand for crude and petro products even at these levels.

Latterly, however, a dramatic downtrend has been noticed with crude trading at around $ 112 a barrel, confirming earlier claims of speculative activity.

There were reports of recessionary trends in the U.S. economy and efforts by major consumers to move away from petro products to alternative fuels and nuclear power.

It is now being asked in market circles whether the 20 per cent fall in crude prices from the peak level is indicative of a new downtrend. There is also heavy discount for forward positions.

Will it therefore be justifiable to expect a level of $ 80-90 a barrel in the not distant future? Already, prices of several other important commodities in world markets have come down.

Thus the inflationary pressures due to external factors may tend to be less severe henceforth. The rate may well recede to 8-9 per cent by March next.

Meanwhile the Indian economy has been going through an extremely difficult phase and the import of crude and petro products in deficit in a rising market has had to be managed.

With no attempt by the Petroleum and Natural Gas Ministry to restrict consumption, crude imports had zoomed to 121.67 million tonnes last year from 111.50 million tonnes in the previous year and 95.86 million tonnes in 2004-05.

Product imports had gone up to 22.72 million tonnes from 17.66 million tonnes and 8.83 million tonnes.

The value of all oil imports was $77.03 billion in 2007-08 against $56.94 billion in 2006-07.

The actual foreign exchange outgo on these imports would have been much higher but for the appreciation of the rupee against the U.S. dollar by 11.03 per cent.

Even if the downtrend continues and crude prices recede to $90 a barrel and even lower, the average price this year may not be less than last year’s average.

And the rupee cost of imports may not decline proportionately as the Indian currency has been weakening against the dollar and other major currencies. This is why Petroleum and Natural Gas Minister Murli Deora has been ruling out any further reduction in retail prices for gasoline, diesel and cooking gas.

The current prices were fixed on the basis of $68 a barrel for the crude basket.

It will however be feasible to reduce subsidy on sales of controlled products. This may help the oil marketing companies cut their share of the burden and improve their finances.

Even so the dependence on oil imports cannot be avoided in the absence of a breakthrough in indigenous production of crude and natural gas and success in efforts to maximise power generation from non-conventional energy resources.

In the immediate future, of course, oil imports will remain high as any increase in indigenous output of natural gas and crude from new off-shore and on-shore regions may be useful in offsetting only a portion of the incremental imports.

It will, therefore, be justifiable to expect that there will be only a moderate decline in the subsidy burden. The less pronounced inflationary pressures due to the external factors will be helpful in lowering the growth in the inflation rate to 8-9 per cent by March next year from the current higher rate of 12.44 per cent.

The current account deficit this year is slated to be as high as $41.5 billion (according to Dr. C. Rangarajan) against only $ 17.4 billion in 2007-08 and it will be possible to bridge the large gap with capital inflows as in earlier years. But the net rise in forex reserves will be much lower than in the past year as FII inflows have been dwindling latterly due to the depression in the bourses and political uncertainties.

It will, of course, be possible to meet all commitments as the inflows including short term borrowing and other debt receipts will be more than higher current account deficit.

Foreign direct investments can be expected to be sizable. In the absence of definite measures to minimise the growth in consumption of petro products, imports will continue to rise.

The throughput of the refineries was 156.10 million tonnes in 2007-08 against 146.55 million tonnes in 2006-07 and only 103.44 million tonnes in 2000-01.

If this uptrend remains in evidence, the throughput in 2014-15 may well exceed 220 million tonnes. This clearly indicates the magnitude of the task before the Central Government.

The performance of the economy, however, may not be flattering as even with a further increase in the output of food and cash crops, growth of agriculture will be only 2 per cent against the 4.6 per cent last year.

Also, there has been a distinct slowdown in industrial growth to 7.5 per cent against 8.5 per cent. The services sector’s contribution too will come down to 9.6 per cent from 10.8 per cent.

The growth in GDP is thus placed at 7.7 per cent against the earlier estimate of 8.5 per cent.

However, in the absence of constructive measures to stimulate industrial growth the rise in production may not be more than 5 per cent. As a result GDP growth may turn out to be lower than 7.7 per cent.

P. A. SESHAN

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