What Are The Factors That Can Derail India's Growth Story This Year?

The recent demand for higher allocation of domestic fuel by non-power coal consumers underline the risks before the country in achieving the desired level of growth. The risks are mostly external and are also appreciated by the Reserve Bank of India (RBI) while projecting a tad lesser growth in 2022-23 than the Economic Survey.

First thing first, the hue and cry about domestic fuel have more to do with subdued imports in the face of spiralling prices in the international market. The reasons for price volatility vary from Covid-19 pandemic, the temporary export ban by Indonesia, to the Ukraine-Russia standoff.

Between December 2020 and January 2021, the benchmark (HBA) price for thermal coal in Indonesia increased by over 27 per cent to $75.84 per tonne. Prices of the four most-imported Indonesian varieties in India moved up by $12-15 a tonne over the last month.

Naturally, everyone is now looking for domestic fuel, which is not only cheaper but is easier to take delivery, and is free from wild price volatility. During April-December 2021, India’s total electricity generation peaked at 9.4 per cent. But the generation of imported coal-based power was down to half.

The situation is opposite to the Covid year of 2020-21 when power generation was down by 2.5 per cent and Coal India was scrambling for buyers. The non-power sector — like fertiliser, metals etc — made the most of it. Supplies to the sector were up by 10 per cent often at a lower value than usual.

Maintaining such high levels of supply to non-power sector was difficult in this fiscal, in the face of record demand from the power sector. Though pit-head stocks are available, rail logistics is overstretched due to unexpected changes in direction of movement.

Having said that, domestic supplies to non-power sector are only three million tonnes short this year, compared to financial year 221 (FY21). It means the country has done reasonably well so far in ensuring energy security in the face of global disruption. The concern, if any, is about the days to come.

Growth Hurdles

Though Indonesia withdrew the ban on exports, the ship movement is yet to be normal. The coal futures are now ruling closer to the all-time peak reached in October. There were expectations of easing global prices, as China and India are increasing production.

However, such projections may go wrong if Russia invades Ukraine, as is anticipated by the US. Europe is already reeling under a gas crisis and has moved to coal, a good part of which is again coming from Russia.

No one knows what will happen in the case of a conflict in Ukraine. Will coal movement from Russia to Europe come to a standstill? Any such eventually, will send coal prices through the roof. More so at a time when the world has fallen into a fresh love affair with the “dirty fuel”.

Meanwhile, the Brent crude is ruling at $95 a barrel. Shale production is rising in the US but it will take time to peak. Organization of the Petroleum Exporting Countries (OPEC) is in the mood to make up for the (notional) losses in 2020. They will not let go of the opportunity to make more money.

To cut the long story short, the world may witness a return of the energy commodity boom during 2011-2014, when crude ruled way above $100 a barrel and spot LNG (liquefied natural gas) was selling at over $20 an MMBtu (million metric British thermal unit) in Asia.

The impacts are wide-ranging and some of them are already visible like the four-decade high inflation in the US and the widely anticipated rate hike by the American central bank, which will eventually reduce the spread for borrowers in the US to invest in emerging markets like India.

In simpler terms, any rate hike by the US Fed should lead to a lesser flow of foreign portfolio investment and the Indian stock market has already come under heavy selling pressure. Negative market sentiments mean lesser opportunity to raise finance that includes disinvestment targets, which are important in ensuring fiscal balance.

The bigger impact, however, may be felt on growth. India’s retail inflation (consumer price index) stood at 5.59 per cent in December. This is distinctly lower than most global majors and neighbouring economies.

The fear is, India may import inflation. The early signs of it are visible in the squeeze of margins of cement stocks in the December quarter due to cost-push. Efforts to pass the cost-push to the consumer will impact growth potential.

Both the Centre and states have already taken a revenue hit by reducing taxes and duties on liquid auto-fuel. They are not in a position to take more hits on finances. Only growth can save the day for them. Alternatively, there will be an impact on capital expenditure by states.

The World Bank expects the inflationary pressures to ease out by the second half of 2022. The prediction, if comes true, will save the day for India. Thankfully, post-Covid the world has a vested interest to see the growth cycle sustaining and that’s the biggest advantage this time.

Fiscal Uncertainties

Inflation apart, the biggest worry to the global economy at this juncture is the debt-pile created during the pandemic. The World Bank benchmark is 72 per cent debt-GDP (gross domestic product) for countries. According to Fitch Ratings, India’s debt-GDP stands at 90 per cent, similar to Brazil.

If you think this is worrisome, then look at the US (133 per cent). The same Greece that had once pushed the EU to the brink of a financial collapse, now has a debt-GDP ratio of 206 per cent. Of other PIGS countries, Italy is 154 per cent, Spain 120 per cent and Portugal 130 per cent.

Neighbouring Sri Lanka is witnessing a dual attack of hyperinflation (over 14 per cent) and 101 per cent debt, Bhutan 123 per cent and Maldives 137 per cent. Japan tops the list with 256 per cent. France, Belgium, Cyprus and Singapore all have distinctly high debt piles.

What will happen if there is another credit default? If another European country wants a bailout? China tackled the Evergrande collapse. There are more hidden debts behind the iron curtain. How many of them can the world suffer?

The world doesn’t want to face these questions at this juncture. But, everyone knows that a slight breach can bring bad news for all.