oil shock

Source: The Hitavada      Date: 12 Sep 2018 11:56:00

THE country is currently reeling under the impact of oil shock and the rupee’s seemingly unstoppable tumble to new historic lows. That has made the policy planners to put their thinking caps on. And predictably the fickle sensex has joined the turmoil in taking a huge plunge in a single day, wiping out an astronomical rupees two lakh crore worth of wealth of investors within a matter of a few hours. With some positive tidings anywhere in the world and the sensex could regain its original level within some days because of its speculative nature. That should not be much of a worry.

The real worry for the Government would be the new low levels the rupee is tumbling to and how to arrest the slide and reduce its impact on prices so that the country is not thrown into another bout of inflation. Another major factor of worry is the rising cost of import of petroleum products and the adverse impact on the country’s foreign exchange reserves, affecting the Current Account Deficit (CAD) considerably. Since January 2018 the rupee has depreciated by nearly 13 pc. On Monday it touched the life time lowest level of Rs. 72.45 against US dollar, though on the intervention of the Reserve Bank of India (RBI) it recovered somewhat. It appears that the RBI may be required to intervene on a regular basis till the domestic currency stabilises.

As the rupee keeps on reaching new lows the petrol and diesel prices too keep on rising in tandem. This is a sure recipe for stoking inflation which will in turn compel the Reserve Bank to raise the interest rates when it takes the next monetary policy review. This may not be digestible to the Government in an election year. It is also unfortunate that this crisis has emerged at a time when the country’s economy has resumed its growth trajectory and the GDP is slated to show a robust growth. In this situation if there is rise in interest rates and inflation, it will have an adverse impact on domestic demand. A depreciating rupee also will make fund raising abroad by Indian companies costly.

There is a demand from some quarters to reduce excise duty and various state taxes on petrol and diesel. But constrained by fiscal deficit, neither the Central Government nor the states appear to be in a position to concede to this demand. Conceding this demand would mean huge loss of revenue for the states and Centre. The fiscal health of most states is stated to be precarious and hence they are in no position to reduce taxes on petrol and diesel. If the Central Government agrees to reduce the excise burden, then it will have to sacrifice its development projects, because it is this tax revenue that feeds the development projects. Thus the Government must be finding itself on a sticky ground that has been caused by external factors.

The trade war between the United States and China is playing its own part in triggering the current wave of crisis, not only in India but also affecting several economies of the world. US President Mr. Donald Trump’s protectionist policies and ‘America First’ has caused lot of turmoil the world over. But this monstrous policy is bound to hit back at the US as well. Several eminent US corporates have been warning the Government against pursuing this disastrous policy. But Mr. Trump appears to be hell bent on a disastrous course.

In such a situation, the only course for the Indian Government is to try to insulate the domestic economy from external shocks like the current one. It may not be possible to insulate the economy from such external shocks in its entirety. But the impact can be minimised to some extent. The Government and the RBI are already in the process of taking corrective measures. The steep fall of the fickle sensex may not be the exact barometer of the state of the economy or nature of the crisis. But the status of the rupee does matter a lot in this situation.