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Friday, 8 January 2016

Despite crises, oil prices to remain low (Pakistan Observer)

Geopolitical notes from India

M D Nalapat


Friday, January 08, 2016 - THE US Federal Reserve Board acted irresponsibly when it increased the bank rate at its last meeting, even if by only 25 basis points, thereby indicating that further rises were on the horizon. This columnist had expected rates to be stable at their present near-zero level, because overall economic situation was still very grim, and the US recovery fragile. Also, Janet Yellen (Chairperson of the Federal Reserve) is a favourite of President Barack Obama, and was expected to not take risks with economic growth by raising rates. Should there be economic turmoil, a paradoxical result will be that the Republican Party will make its way into the White House next January, even though it is the economic philosophy of that party which has exacerbated the economic crisis facing the US, a country where the middle class is shrinking, the poor are in despair and only the super rich are doing well. 

In his first term in office, Barack Obama was faithful to the Bill Clinton line, which is in many respects a Republican Lite policy where economics is concerned. He indulged Wall Street and ensured that those responsible for the 2008 financial crash evaded punishment. Even in his second term, Obama has been faithful to lobbies such as Big Pharma, blocking cheaper drugs from outside the US that can save millions of lives throughout the world. However, he has raised taxes on the super rich from the low levels that were the case under George W Bush, who made no secret of the fact that he was elected to serve only the interests of those who had at least a million dollars in the bank. Janet Yellen must be aware of the fact that the Federal Reserve needs to ensure that growth in the US be safeguarded rather than damaged by the sort of adherence to textbook economics that is seen in India, where Reserve Bank of India Governor Raghuram Rajan has killed manufacturing by artificially boosting interest rates, even as the Finance Ministry has damaged the services sector through higher and higher taxes. 

Both at the Reserve Bank as well as the Finance Ministry, the intellectual input comes from those who have been steeped in US textbooks, and who assume that the Indian economy is no different from that of the US, or at the least should not be different. They have created a policy matrix which goes counter to what is needed at the ground level, and as a consequence, are slowly smothering domestic industry in India. More than any other cause, it is faulty policy that is doing the most harm to the future of India and its 1.26 billion people. While Prime Minister Narendra Modi has been innovative in his foreign policy, in economic policy he has adopted a cautious and conservative approach, which is why the rate of growth of the economy has been falling steadily throughout his term in office, even though it is still higher than that of any other major economy. 

The reality is that India needs 10-12% annual growth to ensure social stability, and the present 7% rate is simply not enough. Interestingly, despite his disastrous record at the Reserve Bank of India (where he has seen banks pile up bad loans and industrial units slowing down), there is talk that Raghuram Rajan may be the next Union Finance Minister, clearly a tribute to his friends in Washington and New York and their expanding influence in India. The factor which has prevented a slide in the Indian economy is the fall in oil prices, which has meant a saving of $26 billion thus far and counting. This windfall has ensured that the ill effects of policy by the Reserve Bank of India and the Union Ministry of Finance have been muted. The government has not shared its gains with the people, keeping the retail price of petroleum products high so as to benefit oil companies as well as the exchequer, and in the process driving up prices, thereby giving Raghuram Rajan the excuse he has been looking for to not cut interest rates by the 3-5% needed to ensure double digit growth. 

The fact of high taxes, high prices and low job creation is what is causing the BJP to get defeated in election after election, even in its strongholds of Madhya Pradesh and Gujarat, where at the rate the party is declining, the Congress Party may return to power in the next state elections, due in a year. Indeed, the failure of the BJP to ensure innovative economic policies, combined with the fact that no action has been taken by the Narendra Modi government on those responsible for corruption during the Manmohan Decade (2004-2014), has led to a visible lack of enthusiasm for the central government that contrasts with the wave of popularity which greeted the coming to office of Narendra Modi in May 2014 However, Prime Minister Modi has been a lucky individual, rising from a humble start in life to becoming an international statesperson known across the world. 

Although there are crises aplenty in the Middle East (or what is called West Asia), these are not expected to have much effect on the price of oil, which is settling at the level of $ 30 a barrel that this columnist had years ago indicated as the correct price if market fundamentals were given full play. The speed with which alternative energy technologies are developing is combining with technological improvements in shale oil extraction to ensure that there is almost zero chance of oil prices breaking through the $ 50 barrier. It is more likely that prices will remain around the $ 30 level, especially in view of the Chinese economy showing significant strain. The drive against corruption by President Xi Jinping as led to a flight of capital from China, while officials are wary of taking decisions at anywhere close to the speed found in the past, for fear that they will be accused of taking bribes. Overall, the official machinery in China is working at a much slower speed than in the past, when there indeed was corruption, but also efficiency. 

Today there is neither corruption nor efficiency, thereby making it imperative for President Xi to work out a way by which officials will once again feel confident enough to take bold decisions speedily. Overall, the outlook for China remains gloomy, as it does for Europe Economics is key in the modern world, where people expect the government to provide a better life. Those governments that fail to do so become unpopular, while those who succeed in boosting growth become popular. The fall in oil prices has created an opportunity for countries heavily dependent on imports of oil, such as India and China. But for the fall in oil prices, their situation would have been much worse than it is. However, unless wiser policies get worked out and implemented in both countries, such windfall gains will go waste.

—The writer is Vice-Chair, Manipal Advanced Research Group, UNESCO Peace Chair & Professor of Geopolitics, Manipal University, Haryana State, India.

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