Monday, August 26, 2013

The Grinding Halt

Rupee’s endless slide against the greenback, widening current account deficit, high inflation especially consumer price indices, RBI’s liquidity tightening policies, indications of capital controls, weak investor sentiments, more than expected weaker market performance of India Inc... The endless list of worries continue to loom large on until sometime back one of the world’s most vibrant and attractive economies that had stood the test of time during the world’s worst recession during 2008, has nearly come to a ‘GRINDING HALT’... Yes, the Indian Economy is in the context and perhaps at this juncture with no clear sign of revival in the near term, investors are pulling out from the market as their confidence has been shaken by the absence of a clear policy direction.

Energy Sector is the Worst Hit
Pricing of energy commodities in India has always been a matter of debate since subsidies and govt. support has always been a part of pricing system which until some years back was highly regulated. Pricing of energy commodities such as coal, natural gas and some liquid fuels are yet to be completely decontrolled. However, over the past couple of years, there have been indications that the intention is to progressively free up prices of energy commodities so that they can work on free market principles.

The deregulation of petrol prices in June 2010 and the partial deregulation of diesel prices in January 2013 are steps towards this. However, the fuel subsidy burden which soared to INR 1,63,000 crores in FY 2012-13 did indicate that sooner or later the market has to move towards converging with global free market pricing systems as the subsidy model is soon becoming unsustainable.

The impact of the sliding Rupee is taking a turn for the worst for the oil sector and especially the oil marketing PSUs and the end consumers and is further aggravating the already persistent issue of fuel subsidies.

Availability of energy resources has added to the woes of the energy sector with sub optimal production of energy resources such as coal, natural gas and crude oil. As a result, the economy is heavily dependent on external sources of energy and imports energy resources to the extent as high as 80 percent which poses a significant threat to the stability and sustainability of the economy and the energy security of the country.
Energy is the lifeline for any country’s economy to scuttle at a steady growth rate. However, for countries which are highly dependent on foreign energy resources, a devalued currency can be the greatest source of worry. Not only does the imports cost dearer, the cascading impact on the current account deficit has a larger impact on the stability of the overall economy.

Oil Imports Stretching CAD further

As per recent reports, the current account deficit moderated from a sharp rise to 6.7 percent during Oct-Dec 2012-13 to 3.6 percent during the last quarter of 2012-13 averaging around 4.8 percent for the entire year. However, this decline has been attributed to lower than normal imports of non-oil and non-gold commodities which is as a result of the slowing economy. Oil import however has not seen much decline as depicted in the chart below when compared to the GDP growth rate which has seen a drastic decline.

The rising oil import bill has had its own implications on dollar outflow from the country along with capital outflow from the stock markets. The unswerving demand and appetite for gold in the country has also seen unprecedented levels of gold import which has acted as a sledge hammer on the already hard hit currency “Rupee”.

Revival Tough though not Impossible

With the ensuing weak market sentiments and unclear policy direction, the economic revival looks tough at the moment, however some quick decisions to boost investor sentiments could spell some gains for the economy in the short term. At the moment, the task at hand is to stabilize the currency and reduce the volatility in the market. The next step would be to attract investments into the country which will either be possible through the FDI or the FII route. However, investments through the FII route will only see the light of the day if the market performs better than expected.

A series of policy decisions need to be taken to ease inflation, boost domestic investments and most notably to increase affordability of energy resources to propel industrial production which would have an upbeat cascading effect on the growth trajectory of the Indian economy. However, the challenge lies in making affordable energy resources available in a country which has dwindling supplies of domestic energy resources and is heavily relying on external sources.

                 Infraline Energy Oil & Gas Knowledgebase Team

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