ASSOCHAM: Declining Global Commodity Prices to Spur Domestic Growth

In a reaction to the recent decision by the OPEC to maintain its production at 30 mbpd, price for Brent variant of crude has slipped by over 6% – a level last seen in 2010. Given weak global demand, sufficient non-OPEC supply and a strengthening Dollar, crude prices have eased by a cumulative 38.2% since mid Jun-14. Given the evolving demand-supply dynamics, the oil market is likely to find a new ‘lower’ equilibrium in the coming months. The sharp correction in commodity prices including crude bodes well for India’s macros. ASSOCHAM outlines 3 key channels through which international commodity price correction is expected to galvanize India’s growth momentum:

• Easing of Inflationary pressures: CPI inflation eased to a series low of 5.52%YoY in Oct-14, led by the sub-category ‘transport’ which captured the impact of declining international crude oil prices on reduced prices of diesel and petrol. ASSOCHAM estimates a 10% decline in crude basket to have a direct impact of 20 bps on retail inflation, if current trends sustain. Given the commodity price dynamics, it is likely that CPI inflation undershoots RBI’s Jan-15 target of 8.0% by at least 130 bps along with eliminating the upside risk to the 6.0% target for Jan-16 target 

• Maintaining Fiscal Discipline: The sharp drop in international crude prices has not allowed the new Government to-

- Deregulate diesel prices in a bid to lower the subsidy burden

- Increase the excise duty on petrol and diesel, expected to add close to Rs 5000 cr to exchequer in FY15

On balance, our estimates suggest a 10% decline in international commodity basket to correct India’s fiscal balance by 0.10 ppt (as a % of GDP). 

• Correction in Trade Balance: Reflective of the decline in prices, India’s oil imports have declined appreciably by a cumulative 25.5%YoY in the past three months. According to our estimates, a sustained 10% decline in international commodity price basket is expected to lead to an improvement of USD 14.8bn in India’s trade deficit or 0.6% in CAD in FY15

By not only allowing an improvement in the energy intensity of manufacturing sector, lower commodity prices working through channels of inflation, trade and fiscal balance, are improving the domestic growth-inflation mix. This coupled with a supportive policy environment is expected to revive India’s growth momentum to over 6.0% in FY16. ASSOCHAM believes that a faster than expected pace of disinflation led by global crude prices would provide RBI the comfort to cut rates by up to 100 bps over the next one year, which will in turn provide a fillip for industrial growth.

Sincerely,        

Rana Kapoor

President, ASSOCHAM