The price of crude oil, the largest internationally traded commodity always remains volatile. It causes economic boom and slowdown for many countries at the same time. In 2016, the price of oil fell drastically after a long time. The significant fall of oil prices, from a peak of $115/barrel in the mid of 2014 to $40 in 2016 was definitely an important global macro-economic incident (Exhibit – 1). The 2014-16 oil price fall is considered as one of the largest shocks after the world war II.

What was its effects to the global economy?

  • Impact on oil exporting countries:

The drastic price fall led to reduced profit and severe losses to many oil exporting countries. More than 70% of oil exporting emerging market and developing economies faced slow growth in 2015 and 2016 (Exhibit – 2), while many of the countries (e.g. Nigeria, Russia, United Arab Emirates) witnessed collapse in consumption. Lesser revenue from oil export caused abrupt cuts in government spending of those counties. It eventually triggered significant deficit in the government budget, lesser investment in several sectors and economic slowdown.

  • Impact on oil importing countries:

Many oil importing countries, especially the emerging ones took the advantage of reduced oil price. The oil import bill of the countries came down. Global oil import surpasses the export (Exhibit – 3). Lower oil prices reduced cost of transport. It led to lower costs for business, which increased the overall profitability. Otherwise the subsidy burden on oil provided by the government of various regions also minimized. It helped the country to invest in several other sectors and made their fiscal position stronger.

What was the effect of low oil price in India between 2014 -16?

Significant emerging economies like India jumped to 3rd position and China jumped from 2nd to 1st position as the oil importers between 2014 to 2016. Country like India, which has 70% – 80% dependence on oil really took the advantage. Due to falling oil prices, trade balance, current account deficit and inflation of the country improved and fiscal deficit reduced. A glimpse of the healthy economic condition of India is understandable from the following graph (Exhibit – 4) where compared to the oil exporting emerging countries (Exhibit – 2) India was experiencing positive economic condition between 2014 -16.

The current status of oil price in global economy?

In November 2016, the OPEC decided to cut down oil production for the first time since 2008. It confirmed to secure a cut in its oil production from 33.8 million barrels/day to 32.5 million barrels/day. This particular step was taken with this hope to bring the stability back into the oil market. In June, 2017, the price was $44.20 and after this, as an effect of the decision of OPEC to cut the oil production, the price started rising. The average global oil price touched the value of $76.73/barrel in October’18. The higher prices were boosted by OPEC-led output cuts, falling Venezuelan and Libyan output and also drop in Iranian exports as US sanctions returned in November this year.

How India is being affected currently by the rising oil price?

Currently, the new oil price regime along with India’s heavy reliance on imported crude will again increase the import bill and widen its current account deficit. The widening deficit will weaken the value of rupee and India’s fiscal structure could be affected. Due to the combination of high oil prices and weak rupee the value of oil import bill could spike to $114 billion in 2019.

Global events affecting the emerging nations

  • Trade war

Why the trade war actually started in 2018?

On March 1st’18, US President has signed an order for special tariffs of 25% on imports into the United States of foreign steel, and 10% on aluminium. The main reason behind this tariff imposition of US lies in avoiding the products of China. According to the opinion of Trump administration, US economy has always been damaged by the unfair trade practices of China. As their retaliatory measure, China also imposed 15% and 25% tariff on 128 products which are exported from US to China. Hence, that’s how the whole thing started.

What was its effect on India and other emerging nations?

This decision was quite unfavourable to all the countries which depend heavily on the export of steel and aluminium to US. India is amongst the top manufacturers in Steel and Aluminium but it is a minor exporter of the two metals to US. It exports less than 10 percent of its total production. Tariff imposition would not influence the Indian industry to a great extent, still the export revenue from Indian export will be hampered. Besides, several other things can be impacted by trade wars which may influence the economic conditions of India and the other emerging nations.

Imposition of tariff will make the imported goods expensive in US resulting lower demand of it and lesser income of the exporting countries. It directly leads to lower capital inflow and economic slowdown more or less to all the nations of the global economy. Otherwise, depreciation of the exporting countries’ currencies, delay in the cross-border investments may also become the outcome of such trade wars.

  • Currency market doldrums:

What has happened to the currency market in 2018?

In 2018, the currencies of the emerging economies like the Turkish Lira, Iranian Rial, Russian Ruble, Indian Rupee, Argentine Peso, Chinese Yuan and South African Rand and many more started to fall compared to the US dollars (Exhibit 6 – I).

It has happened because of the dollar denominated debt market of this emerging economies. Back in 1990s, these countries started to acquire debt denominated in US dollars by selling bonds to US. It was their initiatives for raising the domestic capital balance for investing in several aspiring projects. At that time, it was fairly risk-free method to start economic activity in these countries as long as their currency values remained stronger compared to the US currency.

The process started an unrestricted capital flow to the emerging economies. The thing about which the emerging nations might be unaware that this capital inflow could wash out their newly stabilised financial market in the form of repayment of those dollars denominated bonds after their maturities.  After the recovery of 2008 financial crisis, the dollar values gradually get strengthened. The currencies of the developing nations also started to get affected by US – China trade war, booming oil price and US Fed rate hike and many other geo political and economic issues (Exhibit 6 – II). Hence, the value of their debt amount to US also takes huge jump. According to the report of the Bank of International Settlements, the U.S. denominated debt to non-bank borrowers reached $11.5 trillion in March 2018. A few glimpses of the debt structures of some emerging economies have been mentioned in the following graph (Exhibit 6 – III).

What is the condition of India under such currency crisis?

The rupee is already depreciating against the US dollar. Currently, it is the second worst performing currency among the BRICS country after Russian Ruble. On 9th Oct’18 it dropped to its all-time low value ₹ 74.33. Between 1990 to October 2018, the exchange rate of the Indian currency has fallen at CAGR – 5.07% against the US dollar (Exhibit 6 -IV). Reasons behind such fall is all the previously discussed global economic issues; the rising crude oil price, trade war, the booming fed rate, widening trade deficit, capital outflows and several other factors.

  • Fed rate hike

Lower Fed rate was an effect of the severe financial crisis which took place in US between December 2007 to June 2009. It was a strategy to increase the level of money supply in the whole economy by lowering the rate of interest in order to encourage borrowing. The process actually made borrowing easy and it eventually led to the hike in the level of consumption, stabilised the inflation and lowered the unemployment rate. After seven years of the accommodative monetary policy in US,  the Fed approved a quarter-point increase in its target funds rate on December’15. Between Jan’17 to Oct’18 the fed rate grew from 0.65% to 1.95% (Exhibit – 7). So, the raised rate can attract the investors and the capital accumulation of the US economy can be increased.

Impact of Fed Rate Hike in India & Other Emerging Economies

Emerging markets assets have been purchased in bulk in the post-recession period, but now, the situation is expected to change. Now the Fed is in the phase to raise the rate of interest which is going to put pressure on the emerging economies.

I. Domestic interest rate: In the current situation, India has started to ease interest rate and US is doing the opposite. It will divert the foreign investors towards investing their capital more in the US economy.

II. Bond & Stock Markets: With rise in US yields, Indian bonds will be of lesser value and may face a situation of a sell-off by foreign investors.

III. Impact on rupee: Appreciation of US dollars are making the Indian rupee weak. Simultaneously, trade deficit will also expand as weak rupee will make imports costlier.

IV. Effects on Indian Companies: Borrowing costs of Indian companies that had raised funds from international markets will increase because the value of dollar denominated debt has jumped. This will hit the earning per share of Indian firms.

What are the other serious domestic economic problems of India?

  • NPA (Non – Performing Asset):

The public-sector banks in particular lent out in a large scale to the innumerable corporate houses. However, due to several types of risk factors and failures in most of the cases, many of the corporate giants were unable to pay back the loans. Hence, India is currently burdened by the huge amount of bad loans.

This is not a sudden crisis in the country. India’s ratio of NPA to the gross loans has shown a sharp climb in the last 5 years (Exhibit – 8). It has grown at a CAGR of 41.2% between Dec’13 to Jun’18. The amount is increasing at an average rate of 830 billion in every six months.

How it is affecting India’s economic condition?

According to the statement of RBI, banks will keep suffering from the problems of NPA in the current fiscal year.

I. The rising level of NPA has made the revenue streams of lender banks weak. If the banks would not be able to recover the money in the stipulated time frame then it may lead to loss of funds for the shareholders of associated with them.

II. Crisis of capital in domestic market also creates problem to deal with the international factors like oil price hike, trade war and many more.

III. Long-lasting stay of this crisis may lead to vicious circle of such trend and could be the reason of economic slowdown of the Indian economy.

  • Liquidity crunch in NBFCs(Non – Banking Financial Companies)

IL&FS (Infrastructure Leasing & Financial Services), the leading lending giant actually funds in huge infrastructure, finance, social and environmental services of India. According to the information, the company has helped develop and finance projects worth 1.8 trillion rupees ($25 billion). The shareholders of this organizations include the largest groups like LIC, SBI and many more (Exhibit – 9). However, as per the latest update, IL&FS has about $500 million of repayment obligations over the next six months and its debt is around $12.6 billion.

The financial condition of IL&FS has become so much stressed that it currently needs a capital infusion of Rs. 3000 crores. It has also proposed Rs. 4500 crores as its right issues.

What’s been the impact?

  • The financial, money and stock market started to get affected as an outcome of this. The market indices, Sensex and Nifty, fell due to the IL&FS crisis.
  • The holdings of IL&FS have been marked and further operations of money inflow and outflow have been halted for a specific time period. It’s short- and long-term borrowing programmes have also been downgraded by an eminent rating agency.
  • The defaults have threatened the investors, banks, mutual funds and different other monetary bonds associated with IL&FS. All the investors may face partial or full amount of loss from their investment in IL&FS. It has also created panic among several NBFCs who usually face such kind of financial difficulties.
  • The status of the ongoing and upcoming infrastructure projects of India has become questionable after such situation. The national infrastructure project plans of the current fiscal year include works of around 20,000 kilometres of national highways and ring roads in 28 major cities .
  • After such situation, the many Indian banks are also unwilling to provide loans given to IL&FS.

Currently, IL&FS needs immediate capital infusion of Rs 3,000 crore and has also proposed Rs 4,500 crore as rights issue. However, at the Annual General Meeting of the company on at the end of September, shareholders like the State Bank of India (SBI), Life Insurance Company (LIC) and Orix Corporation – agreed to subscribe to the proposed Rs 4,500-crore rights issue.

How can India recover from this situation??

India has maintained a growth regime of 7% to 8% for a long time. Keeping this kind of growth rate is quite tough when several parts of the world economy is found to be suffering from recession, depression, slow growth rate and many more economic factors. Any kind of outer shock like trade war or fed rate hike are capable enough to influence India’s economy. Still lower cost of living, well-educated technology workers, strong base of human resources, major dependence on agriculture, government consumption, overall investment demand have helped the country to deal with such external shocks in easier way.

The Way Forward:

What can India currently do when it’s facing multiple numbers of internal and external economic shocks?

Currently, the situation has appeared when world economy is again being disturbed by several economic issues. A detailed analysis of these have already been described in the previous segments.

  • The recent ranging of high oil prices may still grow in the upcoming time. The reduction on oil import is highly recommended as a solution. Recently the price of crude oil has fallen and minimizes the trade deficit of India.
  • Fall in US equities in the coming year may help to raise the value of Indian Rupee. Till then, it might be lower for a while.
  • The trade tension between China and United States could help India if it chooses to export all those things which China used to do. May be, it would be tough for India to adopt that level of versatility, still it would help them to become more competitive and earn more export revenue.
  • The problem which is affecting India right now is the twin deficit – budget and trade deficits. Once the former is improved then the country needs to increase its exports. This in a way can help to reduce the trade deficit.
  • For strengthening the economy, what is currently important for India is to increase the FDI by attracting foreign investors. It might be taken place in the form of import or industrial investment. For achieving that, India needs to create an environment where the investors can find it suitable to engage their money. Along with the encouragement towards local and foreign business, government should also make their regulatory hurdles flexible for businesses.


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