The din at financial centres across the world and especially in India today is that the Indian economy will probably soon be the only one in the world with a double digit annual GDP growth rate combined with a low single digit inflation rate which is a combination that is probably the best of all possible worlds in this globalised phase of capitalism. The Bharatiya Janata Party (BJP) Government which is about to celebrate the completion of its first year is shouting itself hoarse that a combination of the dynamic leadership of the Prime Minister, Narendra Modi, and his business friendly policies has helped it to achieve this dramatic turn around from the doldrums in which the earlier Congress Government had left the country.
The reality, however, is that the dynamism in the economy has come due to the fact that inflation has been tamed as a consequence of the drastic fall in global crude oil prices. The prices have fallen from US$ 110 a barrel in May 2014 to a low of US$ 50 a barrel and are now at US$ 65 a barrel. Since crude oil and its derivatives are so integrally a part of all sectors of the economy, its price is a significant determinant of the level of inflation. Especially so in the case of India because this country has to import about 80% of its crude oil requirements and the high price of crude further escalates the import bill and negatively affects the foreign trade current account deficit (CAD). In fact high inflation and a high current account deficit push down the value of the rupee in international currency markets resulting in higher prices having to be paid for other imports as well. Thus, the precipitate fall in crude prices has had a huge positive multiplier effect on the economy by reducing the CAD, pushing up the value of the rupee and controlling domestic inflation and so simultaneously boosting consumption and easing the milieu for investment and production. Consequently economic activity in all sectors has begun to improve and the growth rate is on the rise.
The precipitate drop in crude prices is due to international geo-political developments related to discovery of new sources of oil from shale strata in the USA and the pressure exerted by it on Saudi Arabia not to cut its production and so keep prices high but to let them fall so as to deliver a body blow to the Russian economy which survives mainly on the support from its oil and gas exports. Russia has been annexing parts of Ukraine which have a Russian ethnic majority population and this hasn't gone down well with the USA and its European vassals and so they have been doing their level best to cut the earth from beneath the Russian economy.
So if for some reason the USA feels that the prices of crude should be spiked up again the whole bottom will fall out of the Indian economy and it will be wallowing in the doldrums again despite all the chest thumping that the BJP and its bluff master of a leader, Modi, are doing at present. In fact the bluffing by Modi has been across the socio-economic spectrum from cleaning up India and especially the River Ganga, to providing financial inclusion to the poor to making India a global manufacturing hub. All hot air with little actual implementation because there is little appreciation of the technical, social and political challenges involved in making these into reality. However, since the stars have favoured him through a fall in crude oil prices, nobody can call Modi's bluff at the moment!!
The lesson to be learnt and one that should have been learnt and acted upon decades back is that India has to be weaned away from crude oil in particular and fossil fuels in general. It is eminently possible to do so by relying on solar and bio mass energy which can be produced quite efficiently in a decentralised manner and used equally efficiently with direct current technology as opposed to the present alternate current technology. However, as in much else, policy making in India in the energy sector also is cockeyed.
The reality, however, is that the dynamism in the economy has come due to the fact that inflation has been tamed as a consequence of the drastic fall in global crude oil prices. The prices have fallen from US$ 110 a barrel in May 2014 to a low of US$ 50 a barrel and are now at US$ 65 a barrel. Since crude oil and its derivatives are so integrally a part of all sectors of the economy, its price is a significant determinant of the level of inflation. Especially so in the case of India because this country has to import about 80% of its crude oil requirements and the high price of crude further escalates the import bill and negatively affects the foreign trade current account deficit (CAD). In fact high inflation and a high current account deficit push down the value of the rupee in international currency markets resulting in higher prices having to be paid for other imports as well. Thus, the precipitate fall in crude prices has had a huge positive multiplier effect on the economy by reducing the CAD, pushing up the value of the rupee and controlling domestic inflation and so simultaneously boosting consumption and easing the milieu for investment and production. Consequently economic activity in all sectors has begun to improve and the growth rate is on the rise.
The precipitate drop in crude prices is due to international geo-political developments related to discovery of new sources of oil from shale strata in the USA and the pressure exerted by it on Saudi Arabia not to cut its production and so keep prices high but to let them fall so as to deliver a body blow to the Russian economy which survives mainly on the support from its oil and gas exports. Russia has been annexing parts of Ukraine which have a Russian ethnic majority population and this hasn't gone down well with the USA and its European vassals and so they have been doing their level best to cut the earth from beneath the Russian economy.
So if for some reason the USA feels that the prices of crude should be spiked up again the whole bottom will fall out of the Indian economy and it will be wallowing in the doldrums again despite all the chest thumping that the BJP and its bluff master of a leader, Modi, are doing at present. In fact the bluffing by Modi has been across the socio-economic spectrum from cleaning up India and especially the River Ganga, to providing financial inclusion to the poor to making India a global manufacturing hub. All hot air with little actual implementation because there is little appreciation of the technical, social and political challenges involved in making these into reality. However, since the stars have favoured him through a fall in crude oil prices, nobody can call Modi's bluff at the moment!!
The lesson to be learnt and one that should have been learnt and acted upon decades back is that India has to be weaned away from crude oil in particular and fossil fuels in general. It is eminently possible to do so by relying on solar and bio mass energy which can be produced quite efficiently in a decentralised manner and used equally efficiently with direct current technology as opposed to the present alternate current technology. However, as in much else, policy making in India in the energy sector also is cockeyed.
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