Advertisement
X

Why Global Recession Can Be Good News For Modi Government

From crude, metal to edible oil, prices of most commodities are dipping—a good news for India which is a net importer of commodities

The last two quarters have been tough for the Modi government with the Indian economy facing the whammy of the declining value of Indian rupee against the US dollar. Add to that rising inflation across commodities and the result is skewed consumption levels. Subsequently, when the Reserve Bank of India (RBI) was forced to increase the policy rates to control inflation, the fears of stagflation came knocking on the door.

Advertisement

The global economy is sailing in the same boat. Fears of recession have gripped countries worldwide. In a recent report, Nomura Holdings said that several major economies are set to enter recession over the next 12 months. Bearish government policies and spiraling living costs have thrown the global economy into a synchronised growth slowdown.

Along with the US, Nomura anticipates that Europe, Japan, the UK, Canada, South Korea, and Australia would also enter the recession camp. As many as seven central banks across the world have opted for tighter rates to control rising prices to shield their economies from the repercussions of the ongoing Russia-Ukraine war. 

This is where good news begins for India. 

India’s Gain In Global Slump 

The fear of recession is now cooling down commodity prices. From crude, metal to edible oil, prices of most commodities are dipping. This comes as an opportunity for India which is a net importer of commodities.

Advertisement

In the retail market, edible oil prices have started easing with softening of international rates. The fall in edible oil prices has primarily been driven by Indonesia lifting its ban on export of palm oil. India stands to benefit from the trend as it imports more than 60 per cent of its edible oil requirement. 

Since April, global prices of base metals are seeing a sharp fall as well. While that might have an impact on the margins made by domestic producers who follow an import-parity pricing, it would boost consumption in India. User industries, like white goods and automobiles, would now be in a position to cut their input costs and pass on the gains to their consumers.

In the case of crude, the black gold is trading below $100 for the first time since May 11 this year. West Texas Intermediate (WTI) crude fell by 8 per cent or $8.67 and dropped to $99.76 per barrel on July 5. The fall in prices is driven mainly by recession fears. Citigroup recently warned that crude prices might touch $65 a barrel by the end of this year and could even dip to as low as $45 by the end of 2023 in case recession hits and cripples demand in advanced economies. 

Advertisement

This, however, might come as a relief for India whose crude oil import bill nearly doubled to $119 billion in the last financial year that ended on March 31 as energy prices soared globally following the return of demand post Covid-19 and war in Ukraine.

India is the world's third largest oil consuming and importing nation. According to data from the oil ministry's Petroleum Planning & Analysis Cell, the country spent $119.2 billion on crude oil imports in 2021-22 (April 2021 to March 2022)—up from $62.2 billion in the previous fiscal year. 

India’s soaring import bill could come down on account of low crude prices, thereby making more room for the Modi government to push demand fiscally and monetarily and revive a hurting economy. 

Dealing With The Domestic Demon

While things look up for the Modi government even as global recession fears loom large, there are several internal fiscal issues that it has to tackle effectively and fast—the biggest one being inflation. 

Advertisement

Despite trying hard and using various policy measures, neither the Modi government at the Centre nor the RBI has been able to control inflation. In May, India's headline retail inflation eased slightly to 7.04 per cent from 7.79 per cent in April when retail inflation had surged to a near 8-year high, breaching the RBI’s inflation target for the fourth straight month.

In a separate note, Nomura said that though the headline consumer price index-based inflation moderated to 7 per cent in May, inflation is yet to peak. According to the brokerage firm, headline inflation is likely to breach the 8 per cent mark in the coming months.

The increasing prices have been forcing the RBI to step in and announce rate hikes. Last month, RBI’s Monetary Policy Committee voted unanimously to increase the repo rate by 50 basis points to 4.90 per cent to rein in inflation. According to RBI’s own estimates, inflation is expected to average 7.5 per cent in the April-June quarter. RBI’s projection pegs inflation at 7.4 per cent in the next quarter. It is expected to decline to 6.2 per cent and 5.8 per cent in the third and fourth quarters of this financial year, respectively.

Advertisement

The rate hike announcement also saw the crash of the equity market in India. On the day of the announcement, Sensex and Nifty 50 closed over 2 per cent lower. While they opened on a positive note the next day, the market soon turned volatile, marked by widespread selling across the board. The bloodbath was on account of concerns that the central bank would follow it up with more aggressive rate hikes to control inflation.

The prevailing global conditions, which are aligning to push India’s domestic consumption growth, might also prove to be a solid weapon for the Modi government in its fight against inflation. 

Show comments