Mohammed Hassan, on Pixabay
IMPORT INFLATION, EXPORT GDP
Russia’s war on Ukraine is also a missile attack on India’s GDP.
No other major economy is as dependent on imported oil as India. Our current imports of crude oil run to about 4 million barrels a day. The Finance Minister’s budget for the coming financial year projected a crude price of 70 to 75 dollars a day. Instead, we are currently looking at a price of over 115. The difference between the two numbers is a drain of more than 40 dollars a barrel, or 160 million dollars a day. If the price remained at this level for a year, that would be an unforeseen import cost of 58 billion dollars.
This increase in the cost of importing crude oil would shrink our GDP by 58 bn USD a year, or a little over 2%, as exports add to our GDP, and imports subtract from it. The relationship between increased imports and GDP is not just an equation in economics, but a dynamic with deep consequences on the economy. I outlined for myself how increased imports are a drain on the economy. Skip the next two paragraphs if you don’t need this primer.
Let’s imagine a product - call it CRO - made entirely from 50 rupees worth of imported crude oil, which sells for 100 rupees. The surplus of 50 rupees flows into the economy, as salaries and wages, processing costs like electricity, office costs, perhaps interest on bank loans, profits, and taxes. Each of these flows generates spending, bank savings, perhaps investments and more jobs, all of which fuel our economy. If the cost of crude now goes up to 60 rupees, and the producer decides he will hold the price of CRO, his profit will go down by 10 rupees. That is 7 to 8 rupees less for him to spend or invest, and 2 to 3 rupees less for the government as tax revenue. That 10 rupees lost to the Indian economy goes to the foreign oil producer, and adds to the economy where he is based.
In reality, the Indian business will probably hike the price of CRO. In response, his customers will buy less of CRO, or have less money to buy other products - probably a bit of both. Thus, the impact of higher crude oil costs quickly ripples out from CRO to businesses across the nation. Profits drop across the board, leading to lower corporate tax receipts for the government. Whether the CRO producer hikes his price or not, the net impact remains the same - less money flowing into our economy, more money to oil producers.
One year of elevated crude prices will hit our GDP by over 2%. The second major hit will come from coal, which we import despite our massive coal reserves. Our imports this financial year will be about 150 million tons. In the last three months, international coal prices have surged from 135 dollars to 325 dollars a ton. Fixed-rate contracts and forward purchases will cushion our import costs for a while, but if these elevated prices persist for a while, coal will add 30 billion dollars to our annual cost of energy imports. That’s another 1% of GDP being shipped out of India.
Good reason, then, for the UN to slash India’s growth forecast for 2022. The longer these elevated prices last, the more havoc for our fiscal dynamics - tax collections will be affected, both because growth is lower than projected, and because the government will try to cushion the impact of higher fuel prices on the economy by keeping taxes low.
The one silver lining of elevated commodity costs is that we can now profitably export wheat, and shrink the bloated stocks of grain in FCI godowns. My rough calculations tell me that this import revenue would offset the higher cost of importing edible oil. This compensating balance in foreign exchange brings no relief to the household budget, as foodgrain and oil are basic to any kitchen. The government has swiftly responded to the pressure on family expenditure, by extending the issue of free rations by 6 months, at a projected cost of 60,000 crores, which was not in the Union Budget.
India’s path to fiscal prudence was already looking rocky. Russia’s assault on Ukraine is going to have major repercussions on our fiscal position. Government spokesmen, the media, and stock-market brokers, may all continue their chant of “All is Well”. But I suspect their conviction must be flagging.
Kashmir on the Yamuna
My son was not yet born when I first learned of a tented camp of Kashmiri refugees on the banks of the Yamuna, in north Delhi. This was in the early 1990s, when my mother was an active social worker. A small group of young Kashmiri men had rung our doorbell, soliciting donations, a little receipt book in hand, of a stock used to acknowledge donations for puja pandals, temple repairs, or blind relief. They pointed me to the 51 rupee donation one neighbour had made, the 101 from another.
My mother wanted to know more about their condition, and despatched a trusted colleague to the Yamuna-pushta, along with the family chauffeur. They reported that conditions would be bleak in the oncoming winter; my family mobilised a consignment of blankets for the camp. Every few months, a couple of young men would come to the door. There was no pattern to our response, but they never went away empty-handed.
When my mother passed away in 2011, we hadn’t seen them in a while. Later that year, familiar faces appeared again, genuinely grieved to hear of her passing. I gave them some money, but when they returned in winter, asked them whether the government was helping them with permanent rehabilitation.
“This is our last winter here. We are getting houses in Jammu. God Promise, we won’t trouble you after March.”
Within a few months, they were back. The homes they were promised were tin sheds, miles away from any possible employment. Returning to Delhi, the able-bodied went back to work packing fruit at the Azadpur mandi. Every few months, I would get messages like this:
“Please, please, please, We have lots of problem. Children need your help, please.”
My son will be 24 this year. In the decades since I first met the ragged young Kashmiris, lean with hunger and fear, our own child was born, and sent to school, stood on his feet, empowered to traverse the world on his own. The arc of their lives, meanwhile, has lurched from one uncertainty to another, from one form of dependency to another. Only 17% of Kashmiri pandits have been provided homes by the government.
This is a government that claimed the CAA bill was driven by humanitarian concern for refugees from other nations. Now that our Prime Minister has been reminded by a film-maker of the plight of refugees from within our own nation, I sincerely hope his good offices can rise from triumphal hate to compassionate action.
Hey Mohit , As usual thought provoking article … as for Kashmiri pandits we all know what the movie was for and what the govt will end up doing or rather not doing anything for them. A few of the Kashmiris I know of , the second generation doesn’t want to go back due to resentment and understandably so but these are people who are well off and have done good for themselves even outside of Kashmir. I think the people on Yamuna might still want to go back to their land .
As for crude oil , some media reports suggests that the govt of india has struck a deal with Russia to get oil at $60 a barrel. While keeping the moral and ethical question aside and if this is true do you still think that gdp will be hit even if this deal goes through ?