Only about 18 months ago, there was an all round mood of despondency due to skyrocketing international price of crude oil and gas for which India depends heavily on imports for its energy requirements. This was the single most important factor responsible for high current account deficit [CAD], pressure on the Rupee and the inflationary effect on the economy.
The scenario on the subsidy front was equally grim. Oil and gas being key ingredients in production of fertilizers and petroleum products [POL], this also led to ballooning subsidy in the face of control on retail prices of latter at low level. During 2013-14, fertilizers and POL subsidies alone were around Rs 240,000 crores putting huge stress on the budget and an overwhelming factor under mining our efforts at fiscal consolidation.
The high fiscal deficit [4.5% of GDP during 2013-14] in turn, meant high government borrowings and high interest rates. This resulted in credit squeeze on corporate sector and increase in cost of capital. All of this led to decline in investment and consequential deceleration in growth to 4.7% [2013-14] even as the common man was groaning under double-digit inflation.
18 months down the time lane, the situation has changed drastically even as as crude oil plummeted from a peak of US$ 114 per barrel as of June, 2014 to less than US$ 30 per barrel now. Likewise, gas has plunged from around US$ 13-14 per million Btu [British thermal unit] to about US$ 6 per mBtu during the same period. The benefits to the economy are unprecedented.
For more or less same level of oil imports [188 million tons] as last year, the outgo during current fiscal at Rs 473,000 crores will be Rs 215,000 crores less than last year. Likewise, there would be substantial saving on import of gas. This will help in containing CAD during current year to less than 1.5% of GDP despite continuous slide in export almost throughout the year.
Oil subsidies have also decreased from a high of over Rs 140,000 crores during 2013-14 to an expected just about Rs 30,000 crores during 2015-16. Fertilizer subsidy too could have declined but for a flawed pricing formula under a long-term supply agreement with RasGas [Qatar] thereby denying India the benefit of lower gas price besides 1/3rd of our urea demand coming from import [its price depends on global demand-supply].
The reduced subsidy in turn, will help rein in fiscal deficit within 3.9% of GDP. This together with inflation as measured by whole sale price index [WPI] remaining in negative territory and consumer price index [CPI] too well within target range set by RBI, has given sufficient head room to the apex bank for lowering interest rate and make more credit available to industry.
The global surplus of oil and gas which led to steep fall in their prices is here to stay in the next couple of years. This implies that the current low price scenario will sustain with possibility of further decline [Goldman Sachs has projected crude oil to go below US$ 20 per barrel, a level last seen in the late 90s]. India will thus continue to reap the aforementioned benefits in near to medium-term.
The declining prices have flip side too. This has impacted corporate involved in commodity business. Thus, the market capitalization of oil and gas, ferrous and non-ferrous metals and mining business has plummeted from a little over Rs 1210,000 crores as of June, 2014 to Rs 640,000 crores as on January, 2016. In crude and natural gas segment alone the decline is Rs 250,000 crores. But, to view this as a big worry will be myopic.
The underlying strength of a company should not be judged merely on the basis of price that sale of its product will fetch [that any way follows a cyclical pattern; if today it is down, it will move up tomorrow]. If, that alone was an overriding factor, in the past when prices were high, ONGC and OIL would have consistently added to their reserves and now would not be stressed for funds to support their expansion and growth.
For core sectors like oil, gas and coal where so called ‘navratnas’ viz., ONGC, OIL, Coal India Limited [CIL] etc operate, it won’t be prudent to view their prospects in isolation from the macro-environment. When, demand for their products is mostly from hundreds of millions consumers whose purchasing power is low, a high price cannot be the basis for their sustainable operations in the long-run. Indeed, we need to learn from the past.
To ensure that POL products remained within the reach of common man and yet avoid excessive stress on tax payer, the government encroached upon a major slice of the profits ONGC/OIL/GAIL made due to high prices. The net result was they were left with inadequate surpluses. Now, with price dropping to realistic level and under-recoveries on POL sales decreasing, these PSUs have been exempted from sharing burden. So, they can move forward on a sustainable growth path free from any encumbrances.
A robust economy with sustainable fiscal deficit, inflation under control, low interest rate and more purchasing power with consumers presents a conducive environment for putting India on a high growth path. So, instead of getting overawed by current lower valuations, these PSUs should focus on increasing domestic production so that India can reduce dependence on imports and face future with confidence especially when oil prices rise.
As regards declining exports or dumping of cheaper imports that some of our industries are facing [steel for instance], this would be confronting them any way when major economies like China are facing slowdown. As against that, the benefits from lower oil, gas and coal prices are unprecedented and stakeholders should fire all cylinders to fully capitalize. Indeed, the cheaper fuel and resultant low cost of power generation can be leveraged to even improve the competitiveness of exports.
So, it is time to rejoice and all stakeholders should work to catapult India to double-digit growth trajectory.