BUDGET, BUSH & OIL Safety margin higher than usually thought
www.thestatesman.net By SAUBHIK CHAKRABARTI
Jaswant Singh’s budget bets on consumer spending and private investment to deliver growth. Excise duty reductions on a raft of products from cars to umbrellas, abolition of dividend tax for shareholders and return of some small change from the taxman — the abolition of surcharge and the increase in standard deduction — are aimed at boosting the first. The second depends on leveraging around Rs 2,000 crore public investment on infrastructure to attract more than Rs 50,000 crore in private investment and retaining the tax breaks on housing loans, thus helping the construction industry. Singh should have added to this by giving a big boost to agriculture. Minus the impetus from farm sector capital formation, it is all the more important consumer and entrepreneurial spirits, raised by the budget, be sustained over a period. Will oil price, thrown out of gear by an Iraq war, spoil the planned party?
Supply & demand The answer is a little more complicated than suggested by the scenario of poor, oil-importing India at the mercy of American dogs of war. The possible impact of a war-led oil shock can be analysed in two components. First, the supply and demand scenarios globally. Second, the structure of India’s oil economy. Globally, the supply situation is such that OPEC countries can make up for Iraq’s oil, which will be unavailable for the duration of the war and sometime after it. OPEC is, however, not the force it used to be and should the war affect, say, Kuwait’s supply, the cartel may not be able to compensate for the loss. Oil watchers also point out two oil producing non-West Asian countries, Nigeria and Venezuela, are politically not in the most stable of conditions. Nigeria’s return to some sort of democracy after years of misrule by Sani Abacha will be tested next month in general elections. Venezuela suffered a huge popular protest against President Hugo Chavez’s attempts to reform the economy and oil supplies were disrupted. If the Iraq war gets messy and if Nigerian and Venezuelan politics becomes too exciting, a supply problem may arise. Especially because unlike a decade ago, when George Bush senior, was playing the cowboy in West Asia, global oil companies do not hold too much in reserves, a result of their cutting costs. On the demand side, high seasonal (winter heating) requirements in the northern hemisphere had counteracted weak industrial demand. Had George Bush attacked Iraq when he originally wanted to — late December 2002, early January 2003 — the winter demand for oil would have had a significant impact on prices. France, Germany, Russia and peace marchers everywhere have however delayed Bush. And in the rich industrialised north, winter is giving way to spring. In April and May there is always a big dip in oil demand. That plus the fact that industrial activity in the big economies is yet to pick up, points to relatively less demand side pressure on prices.
India’s oil economy It is possible to argue, therefore, that unless Saddam Hussein decides to go out in a blaze —blowing up Kuwaiti or even Saudi oil fields, for example — and Nigeria and Venezuela are singed by their own home grown fires, the supply demand situation globally may not produce a severe price shock. But remember all three parts of the worst-case scenario are within the range of possibilities. India, however, imports almost 70 per cent of its oil. So, even a modest jump in prices for a relatively short period is something to reckon with. In fact, by the import ratio criterion, India can be said to be distinctly worse off now than during the Gulf War in 1991, when less than a third of domestic oil consumption was imported. But three factors mitigate this. Just before the 1991 Gulf War, India’s paltry foreign exchange reserves would have bought less than half a year’s oil imports, at the then levels of global prices and domestic demand. Now, record levels of reserves — $ 75 billion— can buy four years of oil imports. That, even with an oil price spike, is a big cushion. The second comforting factor is domestic inventory management by the government. India, like many other countries, notably the US, has a better-managed system than a decade back. It is generally thought that the government has an oil inventory large enough to last 45 days of domestic consumption. Third, the oil consumption pattern in India acts and will act as a shock absorber. In rich Western countries, oil is typically the principal fuel meeting the energy needs of the manufacturing sector. In India, more than 50 per cent of industrial energy usage is coal-fired. The share of oil is less than 35 per cent. Transport outruns manufacturing by a long way as the biggest consumer of petroleum products. An oil price hike is therefore felt primarily through higher transportation costs and not through industrial costs going haywire. Economic dislocation is therefore less severe. An added layer on this structural insulation comes from the downturn in economic activity (industrial slump affects the transport sector). Total oil consumption in 2001-2002 was less than that in 2000-2001. As industry has shown signs of revival in 2002-2003, fuel consumption has picked up. But the oil economy is nowhere near breaking point. Hence Indian industry should not really be panicking at this stage and should survive a relatively short war more or less unscathed. Investor sentiment, accordingly, may not take a big beating.
Fuel prices The consumer? He is not really interested in Venezuelan politics, Exxon’s supply strategy and India’s sectoral energy consumption index. The “real” question for him — the one that will determine whether he buys the stuff Singh wants him to buy — is whether retail fuel prices go up to levels where life becomes very difficult. Not if Ram Naik, the oil minister can help it. Naik has already demonstrated that an interventionist minister can make nonsense out of price reform strategies. After the dismantling of the administered pricing regime — jargon for the government fixing prices — Indian oil companies were supposed to be able to fix domestic prices according to import prices. But Naik hasn’t allowed that so far and will not allow it even more as election priorities become sharper for the government. Therefore, domestic price adjustment to war-led global price hikes will be significantly less than proportional as long as war effects are moderate. This will reduce the profitability of oil refineries, which will have to buy at higher import prices but sell at Naik-determined rates. But they are public sector companies, and so will have to lump it. The other government price intervention, less likely but possible in case of significant hardening of oil prices, is that oil import duties are lowered, thus bringing down domestic prices. Naik has been arguing for this and the finance ministry has been resisting. But Singh may give in if popular discontent on the eve of assembly elections becomes a factor. All told, prospects for Jaswant Singh and his compatriots whom he wants to spend and invest are not scary. Now, if only Bush does not make a Texan bull’s breakfast of his silly war!
The author is Resident Editor, The Statesman, New Delhi