The sharp 3.2 per cent decline in global trade volume and the recent spike in crude prices, which are now nearing the $100 a barrel mark from roughly $70 in June, have raised fears of a global recession.
As of August, the purchasing managers’ index (PMI) in the US (50) and Eurozone (47) was either in the contraction zone or on the verge of it, and it was barely positive for China (52). Considering the recent uptick in global inflation and anticipation of further rate hikes by the US Fed, the economic outlook is not encouraging.
Bain & Company pointed out the “elevated likelihood of a recession in the US and Eurozone.”
Global trade has been weak for some time. For India, the slowdown in merchandise exports was compensated by a shift in demand for services. The trade balance declined from $60 billion to $37 billion during April-August this fiscal.
The looming uncertainties may disrupt this trend, potentially putting pressure on forex reserves.
The current account deficit, largely influenced by the energy import bill, may temporarily rise, leading to oscillations in rupee-dollar exchange value.
Fundamentally though, India has fewer reasons to worry in the immediate run. It is less dependent on the export economy. Consumer confidence is stable and should ensure growth momentum.
The core sector growth reached a 14-month high in August. A large domestic investor base, through mutual funds, insulates the capital market from wild variations due to the potential exit of foreign investors due to interest rate hikes in the US. On the flip side, the global economic turmoil, if any, could coincide with the election season in India.
The political uncertainty may keep private capital expenditure and foreign direct investment (FDI) muted during the first half of 2024. The longer-term prospects of India will, therefore, depend on the election results (expected in May) and the policies of the next government.
A Complex Problem
The problem is complex, and the spike in crude prices following a production cut by the Organisation of the Petroleum Exporting Countries (OPEC) in July has aggravated it.
Global trade reached an unprecedented high between the third quarter of 2020 and the second quarter of 2022, driven by huge cash handouts by the developed West during covid.
A spurt in demand, coupled with supply chain disruption, largely due to prolonged lockdowns in China, triggered inflation. The Ukraine crisis added another dimension to it. Crude petroleum prices reached a 10-year high on June 6, 2022.
High petroleum prices and high inflation impacted the purchasing power of the global economy.
To combat inflation, the world led by the US took recourse to a tight money policy, which further impacted consumption. As a natural corollary, global trade developed weaknesses beginning the second half of 2022.
On the brighter side, crude prices declined throughout the period before stabilizing at around $70 a barrel during the second quarter of 2023. The monetary policy measures and low crude prices helped the global economy tame inflation.
The recent OPEC decision has put it in reverse gear. Between June and August, inflation rose from 3 to 3.7 percent in the US, creating space for more rate hikes.
Russia and Rupee
Crude price hikes are yet to impact India’s domestic economy in a significant way, as the government adopted a levelized tariff mechanism at the retail end last year to navigate global uncertainties.
India raised pump prices of auto-fuel during the June quarter of 2022 and kept it unchanged. It means consumers may be spared from an immediate rise in fuel prices unless crude breaches the June 2022 level.
Predicting crude price movement is a futile exercise. However, considering that the production cut was implemented ahead of the winter stocking season in the West, there is fear that it might rise substantially.
Having said that, India has a new set of problems to address this time. In 2022, India sourced crude from sanction-hit Russia at a deep discount. The two countries also revived the Rupee-Ruble arrangement to reduce demand for the US Dollar. Both advantages are now significantly reduced.
The tightness in the global market helped Russia to cut discounts to a minimal level. According to a Reuters report, India is now buying Russian crude at $80 a barrel, against the $60 price cap set by the West.
Meanwhile, Russia refused to accept payments in Rupee. The problem is old and genuine. The ruble is an international currency, but the Rupee is not. Moreover, as a net exporter to India, Moscow is saddled with a pile of Indian currency.
Between 2021 and 2022, India’s imports from Russia shot up from $8.6 to $40.6 billion. The trade balance increased from $5.3 billion to $37.7 billion in Russia’s favour. What would Russia do with so much Indian Rupee?
However, Moscow might have just opened an interesting opportunity for India by enforcing a diesel export ban in the peak stocking season. According to a September 30 report by Rigzone, “Russia plans to reduce diesel exports from its key western ports to almost nothing next month (October).”
Moscow is an important player in the diesel market. Its absence will have a severe impact on the product market. The benefit will go to India, among other petroleum product exporting nations.
In 2022, India’s petroleum product exports increased by 74 percent to $98 billion, contributing one-fifth of the country’s total exports. The Ukraine crisis catapulted Delhi as the largest exporter of refined products to Europe. The trend continues in 2023.
According to a recent official communique from Germany, petroleum product imports from India were up by 12 times during January-July this year. The moot point is that India has a short-term opportunity to boost export merchandise revenue vis-a-vis the rise in crude prices. An anticipated reduction in crude prices in the winter will keep the economy in safe waters.
An appeal from Swarajya
At Swarajya, we rely on our readers' support through subscriptions to sustain our media platform. Unlike larger conglomerates, we are unable to relentlessly chase advertising money — our model is largely built on your patronage.
Your support has never been more crucial. We work tirelessly to deliver 10-15 high-quality articles daily, ensuring you receive insightful content from 7 AM to 10 PM.
If you believe India's story has to be articulated in a way it has never been done before without shrugging it off, become a patron (or) subscribe now for ₹̶2̶4̶0̶0̶ ₹1999 and get 12 print issues, unlimited digital access for 1 year, a special India that is Bharat T-shirt (Offer ends soon).
We are counting on you!