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Stars (low oil price) help Modi government check inflation
Updated:Aug 10, 2016
 
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By Susmit Kumar
 
After the onslaught of criticism by Subramaniam Swamy, MP (Rajya Sabha), Raghuram Rajan, the current Governor of Reserve Bank of India (RBI), decided not to pursue the second term in the same position in the absence of enough political will and support for his candidature. This led to the US economic media to write an obituary for the rupee and Indian economy. Nearly all of them were giving Rajan the credit for the stability of rupee during his RBI tenure after the turbulent 2011-13 period which saw drastic devaluation in rupee. But the truth is that rupee is stable mainly due to the drastic drop in global crude price.
 
Due to record Current Account Deficit (CAD) of USD 88.2 billion during 2011-13, exchange rate of India’s rupee (with respect to US dollar) went down from 44.17 in April 2011 to 62.92 in September 2013. During 2011-13, crude price went from USD 72 a barrel as high as USD 110 a barrel. As India imports nearly 75% of its crude oil consumption, its crude oil bill spiked to record level. In the last two years, the crude oil price has been hovering at around USD 40 a barrel.
 
In 2014, India’s net crude oil bill was USD116 billion and at USD100 a gallon rate; this number would have been USD 290 billion which India would not have sustained without having a crash in the value of its rupee, maybe to a figure of 100 Rupee to one USD. In 2015 and 2016, its CAD was only USD 26.8 billion and USD 22.1 billion, respectively. In 2015, India was able to overcome a USD 137 billion trade deficit with the help of USD 72 billion NRI remittance and more than USD 50 billion Foreign Direct Investment (FDI).
 
Despite drastic drop in crude oil bill, the Indian government has not reduced the petrol price at the pump and this extra money to the exchequer is helping it to keep budget deficit in check. This is helping the Modi government to spend money on infrastructure projects, like constructing thousands of kilometers of national highways, several ports, dozens of smart cities and modern airports as well as spending on massive welfare programs for the poor.
 
During 2011-13, the then United Progressive Alliance (UPA) government was blamed for the double-digit inflation which was mainly due to record price of crude oil price. As India imports 75% of its crude oil consumption, any increase in crude oil increases the price at pump, resulting in rise of everything in market. Last year, Rahul Gandhi, the Congress Party Vice-President, was boasting in the Parliament about the record rise in Minimum Support Price (MSP) of grains, the price at which the government buys from the growers, during his government. He was criticizing the present National Democratic Alliance (NDA) government for not giving similar raise in the Minimum Support Price of grains in last two years.
Actually, it was a failure of the previous UPA government, for not reining in the trade deficit, which was behind the record rise in MSP prices. Stars are helping the Modi government in keeping inflation in check (due to low crude oil price); otherwise it would have been in financial troubles similar to what the previous UPA government was in.
 
(Dr. Susmit Kumar is a writer and analyst and is the president of Kumar Consultancy based in USA. He can be reached at: susmitk@hotmail.com)
 
 
 
 
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