India’s Toil With Oil: Another Masterstroke From Modinomics

by Sushil Kedia - Mar 14, 2022 06:40 PM +05:30 IST
India’s Toil With Oil: Another Masterstroke From ModinomicsPrime Minister Narendra Modi.
Snapshot
  • The true responsibility of policy is never to ensure the lowest possible prices, but to provide the least cost in obtaining economic stability.

For the first time ever, in what one can remember of our economic history for decades, the media is baffled when will the hike in petroleum products be affected and the government can be criticised yet one more time.

But Modinomics is continuing with its stoic silence. Stoicism of keeping on doing dispassionately, detached action focusing purely on its duties.

It has always been the case that media, opposition, armchair economists, and every other citizen who thinks it is his duty to make opinions has always criticised what was possibly higher price of petroleum goods at retail level than the internationally traded derivatives contracts for crude oil futures would warrant.

Yet, this is the moment when all the baiters hungry to pounce upon the government are just not getting that chance. This is also the moment when it becomes easy to understand by getting an insightful gaze into what this government has really been up to in its masterstrokes of Modinomics.

Masterstroke is the only word that comes to mind in describing how India has been managing its oil price risks, ever since a new way of thought and action came by from 2014.

The true responsibility of policy is never to ensure the lowest possible prices, but to provide the least cost in obtaining economic stability.

The government of India has acted, even if accused to have done this unwittingly, as the market-maker for crude oil prices providing a shock absorber in the wild swings crude oil prices took through the last two years.

A trader, whether as a market-maker or as a directional risk-taker, can add utility of only place or of time. Today is that moment when it stands easily revealed without exercising deep perception that Modinomics added utility of time in its bold management of India’s crude oil price risks.

On the way down, when crude oil prices went even negative for an hour in the coronavirus crash of 2020, when no storage was available at any cost for delivering at the New York Mercantile Exchange, everyone was aghast why the petroleum product prices in India did not go down.

That same feeling of being left aghast in albeit the sense of not having a chance to pounce on the government is widespread now within the self-appointed intelligentsia.

The pursuit of stability is the highest virtue in any policy initiative. Let me explain with a small example. Say, if the intelligentsia was ever correct in howling at why the government was not moving prices lower during the crash of 2020, for a moment let us see what could have happened if the government indeed moved the prices completely in line with the speculatively traded futures contract for delivery on New York Mercantile Exchange.

An Uber driver who may have filled up his fuel tank in the morning at say a price equivalent of $75 a barrel would be howling foul if prices by the evening became $80 a barrel. To prevent his howl the government would have had to allow not only a peak time surcharge that Uber has but also a crude oil price fluctuation surcharge. Well, if this was to happen for just a day the populace may have ignored it.

But imagine, instead of prices jumping up by $5 within the same day, during 2020 when they were rapidly declining. During then another Uber driver who would have filled his tank in the evening at a price equivalent to that is lower by $5 per barrel would have offered a ride at a lower price since a negative fuel surcharge would be applicable and then if this were to happen daily all Uber drivers would have given up driving taxis.

Just imagine if a chaos of a biblical proportion is possible only with taxi drivers refusing to drive taxis anymore, how complex a situation it would be if every producer of every good and service would be exposed to the vagaries of continuously fluctuating prices of a critical business and production input, that is the cost of energy.

Entire economy would come to a chaos if prices for a universally required input, that is energy, would be constantly swinging.

Thus, one can see the virtue of achieving a stable regime for gradual changes so that all and various economic agents can make timely adjustments to their production and delivery of goods/services.

Stability being a desired virtue, should cost anyone seeking it. So, India should as entity pay some price for stability? But the miracle of Modinomics is instead of stability becoming a cost centre, it became a profit centre, for the people of India.

The courage that Modinomics took to keeping prices stable during a global crude oil regime of crash provided India the funding for very large government spendings in infrastructure and managing the coronavirus crisis on one hand, the kickstarting of an otherwise slowing economy too happened with the multiplier effect of continued government spending.

Now that more than enough momentum is back and which is what brought crude oil prices to the levels just before the Ukraine-Russia crisis, this hyperbolic spike due to the war could also get absorbed because the market-maker on behalf of the people of India, that is Modinomics has achieved enough cushion for its spending goals on development and supporting its poor and it can thus withstand this shock.

Let every critic remember one thing clearly. Oil and its downstream products are all a consumable unlike precious metals as gold or silver that are storages of wealth and value. Any price level of a consumable world-wide will be an outcome of the state of the economy worldwide and never be the other way round that the prices of a consumable will drive the direction of the economy.

So, whatever be the level of prices for crude oil globally it will be driven by the fact that if economic strength globally can absorb the largesse the oil cartel — OPEC (Organization of Petroleum Exporting Countries) is keen to extract or not. It is a passthrough cost. No one drinks crude oil or massages with it. It is an input cost into everything else any economy will produce.

Thus, if it is not the level of crude oil prices, but it is the stability of the tolerable changes in crude oil prices that drives the health of the economy, Modinomics has achieved through its sheer stoic, silent strength in pursuing a path whose virtues will be extolled by thinkers in decades to come. In the meantime, the said intelligentsia that continues to rock on its armchairs confined in the ivory towers of their own minds may toil to grab their next chance in oiling down their relevance.

The author has worked for more than 25 years across national and global investment banks, and two large hedge funds. He  was the first Asian to serve on the board of the Market Technicians Association from 2011 to 2014. He tweets at @sushilkedia.

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