Calcutta Notebook

B J

The price of a barrel of crude oil has plunged from US Dollar 140 to USD 30. One stream of economists holds that this will be harmful for India. Economies of oil exporting countries such as Saudi Arabia will come under pressure. They will not be able to employ Indian workers in large number. The remittances sent by Indian workers will decline. India will also not get foreign investment being made by the Sovereign Wealth Funds of oil exporting countries. These facts are correct. However, they ignore the fact that the remittances received are only a fraction of the huge payments being made by the Government of India for importing costly oil. Focusing on remittances and foreign investments is being penny wise pound foolish.

This fall is being attributed to declining demand from China. That is indeed true—but only superficially. Question is why is China's demand declining? Reason is that the developed countries are not buying increasing amounts of goods from that country. That too is a superficial explanation though. Why is the demand from the developed countries declining? Reason is global equalization of wages. Rapid expansion in global trade led to manufacturing activity shifting from the developed countries to the developing countries like Bangladesh, China, and India in the last two decades. Presently the provision of services is shifting to the developing countries, especially India. It has become possible to supply garments and Call Centre services from India. In the result, workers of the developed countries are losing their jobs. Their earnings are under pressure. They are not able to buy cars, TVs, toys and garments produced in China. This has led to reduced demand for Chinese goods. That, in turn, has led to reduced demand for oil and other commodities like iron ore from India. That is the correct explanation for the present decline in oil prices. The decline in demand from China is likely to stay for quite some time because it is arising from basic readjustment of global economy.

How does one explain the very healthy job data coming out of the United States then? These jobs are not being generated from market-driven activities. The US has been losing its competitive edge for more than two decades. This fundamental trajectory of the US economy is being overshadowed by increasing Government expenditures. The US Government is borrowing huge amounts from the global market. This borrowed money is being used to pay welfare benefits to those losing their jobs; and for waging war in Syria. Jobs are being created in these debt-driven activities. Two opposite forces are, therefore, at play. Globalization is leading to loss of jobs but debt-driven expenditures are leading to creation of jobs. The United States and European Union have become one of the most heavily indebted economies today. Needless to say, such debt-driven growth cannot sustain for long. Fundamentally, the developed countries are losing their competitive edge and going downhill.

The decline in the price of oil will be hugely beneficial for oil importers like India. The Government has already increased the taxes on oil. The price of oil for the consumer has not declined in tandem with the decline in the global price. The domestic price of petrol was about Rs 75 per litre when the global price of crude oil was USD 140. The domestic price of petrol is today about Rs 60 per litre when the global price of crude oil has crashed to USD 37. A 75 percent decline in global price of oil has been accompanied with a paltry 20 percent decline in the price of petrol for the consumer. Main reason for this is the increase in taxes. Previously, the Government was providing subsidies on imported oil to keep the domestic prices low. Today the Government is collecting taxes on imports of oil.

India has become hugely dependent on imports of oil. Reduction of price of petrol and diesel for the consumer would lead to increased consumption of these items. That would make Indians even more dependent upon imports and put the economic sovereignty into peril. Higher price of oil will reduce India's dependence on imports.

The Government policy has to be faulted at another level. The taxes are being used to reduce fiscal deficit; and not to increase the desperately needed expenditures. The taxes should be used for developing alternative sources of energy such as solar power so that this windfall income helps people come out of dependency on imported energy. There is also a dire need to increase public investments in highways, ports, e-governance, etc. These expenditures would work like lubricants and take the economy to a high growth path. Instead the Government appears to have a single pointed focus on controlling prices. Therefore, the Government is not making the required expenditures and the economy is under stress. The correct policy was to use the increased tax receipts from oil to increase necessary expenditures and to take the country to greater heights.

Taxes have been imposed on imported oil and domestic price has been maintained at earlier high rates. However, the money obtained from these taxes is being used to cover the fiscal deficit of the Government instead of investing in building a secure future for the country.

Frontier
Vol. 48, No. 36, Mar 13 - 19, 2016