Low oil prices silver lining amid the crisis

Sushma Ramachandran

Senior Financial Journalist

The global economy has been shaken like never before by the Covid-19 pandemic that is raging across continents. Comparisons are being made to the Spanish flu that a century ago ravaged the world, especially in India. This time around, the fatalities are not that high, but experts have warned that the contagion levels of this virus are among the fastest known yet. This country so far appears to have contained those affected by the virus to relatively small numbers, but there are fears that the actual spread in the community may be much higher than is visible right now. The closure of borders is a welcome early step by the government, but the subsequent action to deal with those affected is going to remain a challenge in the days to come.

The Indian economy, already facing a slowdown, had just begun seeing green shoots, indicating that a tiny revival has begun. Industrial output has risen by two per cent in January while exports have turned positive after six months of declining trends. The hopeful outlook turned bleak after reports of a worsening situation in European countries like Italy and Spain as well as the US spooked the stock markets around the world. There were dire predictions of the growth rate for the 2020-21 fiscal going from the expected level of 5.7 to 6 per cent to about 5.3 per cent. This was largely because of linkages between India and China from where the Covid-19 virus originated and where it has seen its worst impact. Industries in this country that rely for their continued operations on components and raw materials from China include pharmaceuticals, chemicals, electronics, automobiles and mobile phones.

But several other sectors have been affected which are not directly linked to China.

The first is the Rs 80,000-crore poultry industry that has seen a meltdown owing to widespread fears that eating meat products is linked to the Covid-19 virus. Despite government assurances to the contrary, the poultry and eggs industry has faced a severe setback. Apparel exports are also in jeopardy as Europe is the biggest market.

Second, the travel and tourism industry is in a crisis with mass cancellations of airline and hotel bookings. Domestic airlines were initially not as affected as foreign airlines since international travel was the first casualty. But now, domestic travel has also become moribund with health experts advising the general public to travel only if it is a dire necessity. Restaurants are reporting a drop in occupancy by about 30 per cent as social distancing is becoming a norm.

And finally, what is of greatest concern is that many jobs in the unorganised sector or what is known as the gig economy in urban areas have dried up, though this may be a temporary phenomenon. Myriad ancillary workers will face livelihood issues as events are being cancelled, malls and movie theatres are closed and schools shut down. Some kind of a rescue package for those affected in the short run needs to be evolved over the next few months.

The fallout of Covid-19 has hit the stock markets as well, with the Sensex crashing along with other global markets. It rebounded briefly and one of the main reasons was because of the big silver lining for India to this entire crisis. And that is the steep fall in global crude oil prices. From $66 per barrel at the end of December, the prices of the benchmark Brent crude are now ruling at $34 per barrel. The reasons are two-fold. One is the collapse in demand owing to the coronavirus crisis, especially from the largest buyer, China. Second is the breakdown of an agreement between OPEC, led by Saudi Arabia, and Russia to curb production enough to keep prices comfortably high over the past three years. The falling out has occurred because Russia felt production cuts leading to firmer prices had been a boon for US shale oil producers. In fact, the US has now outpaced Saudi Arabia and Russia to become the biggest oil producer.

The net result is that India’s oil import bill is set to be slashed drastically in case the prices remain at these low levels. Expectations are that these may actually spiral lower to between $20 and $30 per barrel. The current estimates are that a $10 decline in world prices gives a saving of $15 billion to this country. This could reduce the import bill even for 2019-20 from last year’s $112 billion to less than $100 billion. As for the next fiscal, the bill could literally halve and reach $64 billion, the same level as in fiscal 2016. These projections are based on the medium-term predictions of Saudi Arabia and Russia remaining obdurate on their plans to raise output despite falling global demand and rising inventories.

The repercussions of a drastic decline in the import bill are enormous. It will shrink the current account deficit which has already reduced to 0.2 per cent of the GDP in the third quarter of 2019-20 compared to the same period in the previous year. A government economist has even said the current account deficit could soon turn into a surplus, given the changed scenario.

This gives fiscal space to the government to ensure that the negative economic impact of the Covid-19 is cushioned to some extent. It should ideally try to use these additional resources by putting more money in the hands of the common man through existing schemes like MGNREGA or the PM-Kisan programme. This is imperative because the economy has over the last two months just begun to show a glimmer of revival. The clampdown due to the virus could last just a few months, but there is no surety on this issue. It is, thus, time for the government to take firm measures to ensure that an economic revival package is formulated at the earliest before the medical emergency ends up affecting the livelihoods of millions.

Join Whatsapp Channel of The Tribune for latest updates.