COVID can grease the Indian economy

by April 21, 2020 0 comments

This is the time for the country to take advantage of the falling world oil prices due to reduced demand in order to strengthen its position and fiscal parameters later

The countrywide lockdown necessitated by the Coronavirus pandemic has had a huge impact on the economy, robbing millions of people of livelihoods and also requiring additional expenditure on healthcare. However, amid this gloom and doom, there is a silver lining for the fiscal situation. This is the time to take advantage of the world oil price scenario to strengthen India’s position and fiscal parameters later. The petroleum sector is the single most important one in terms of revenue and expenditure for both the Centre and the States.

India spends about 30 per cent of its import bill on fuel sources and a majority of it is petroleum or crude oil. As per the all-India report submitted to the Delhi-based Petroleum Planning and Analysis Cell (PPAC), 70 per cent of diesel and 99.6 per cent of petrol are consumed in the transport sector alone. Hence, the slightest change in the global oil market will impact our current account significantly.  According to the PPAC, a decline of crude oil price by $1/bbl improves the current account by Rs 965 crore and if the rupee strengthens by one against the dollar, it improves the oil bill by Rs 553 crore.  On the revenue side, petroleum has generated a whopping Rs 5.7 lakh crore in 2018-19 for the Centre and States. 

The price of oil is hovering around $20/bbl and its major consumers (US (20 per cent), China (14 per cent), Japan (four per cent), just like India, are currently battling the pandemic and not likely to push prices soon.  Some projections suggest that crude oil price could hit $12/bbl in the coming months. Today, the US benchmark, West Texas Intermediate, has fallen to $15 for the first time in 21 years due to falling crude demand. To add to this, global oil storage is reaching its limits. The situation is so dire, in fact, that the Department of Energy is considering paying domestic oil producers to keep crude in the ground.

The US Energy Information Administration (EIA) and the International Energy Association (IEA) predict similar trends for crude. Its lower price bound is hovering around $20/bbl and other predictive values lie between $30/bbl to $40/bbl.

Now, let us look at three scenarios to see how India’s fiscal situation can improve, banking on this fall in oil prices.  For the sake of our argument, we will consider only two petroleum products i.e. petrol and diesel, which are a major source of revenue for the Government in the petroleum segment. We are assuming one financial year (FY) i.e. April 1, 2020 to March 31, 2021 for our calculation.

Back to normal but less activity: To simulate this scenario, we will use oil consumption data of 2016-17, or the demonetisation year data. The reason for taking the demonetisation demand and not last year’s is that economic activity will return to the level of a bad financial year. Under this scenario, India will enjoy a huge price advantage. The price of crude is hovering around $20/barrel and according to sources, it is expected to remain at that level for the next six months. Thus we assume an oil price of $20/barrel for six months and $30 for the rest of the year. In this scenario, additional oil revenue generated for the Government could be Rs 1.4 lakh crore.

Slow and staggered normalcy: Under this situation, India will slowly recover and go back to normal economic activity. To simulate, we assume only 10 per cent activity in the first two months, 30 per cent activity in the next two months, 50 per cent in the following two months and business as usual in the remaining six months. The price situation would be the same as in scenario one. In this situation, the Government can get an additional revenue of up to Rs 90 thousand crore.

India lags in controlling COVID-19 and the US recovers: The pandemic has hurt the US the worst. Significantly, the US is also the largest consumer of crude oil.  If the US recovers quickly from the current pandemic and resumes normal economic activity it will make the crude oil price shoot to $30 for the first three months, i.e. April to June, then $40 for the next three months and $50 for the rest of the year. In India’s case the demand situation will be slow in recovering and experience a staggered improvement, like in the second scenario. In this situation, the Government can raise an additional Rs 23,104 crore over the FY.

Our calculations show that India’s advantage varies from Rs 1.4 lakh crore to a few thousand crores. This shows how current actions can shape up our fiscal situation in the next year and so.

Conclusion: The three scenarios described above suggest that starting economic activity before the European Union and the US will give India a comparative advantage internationally and more importantly in domestic business. It will also provide a window of opportunity for the Government to improve its fiscal situation.

India can use this opportunity to improve its current account deficit (CAD) position and exchange rate. Less pressure on imports and huge export opportunities in the healthcare-related sectors should strengthen the rupee and improve the CAD.

On the employment front, return to normalcy can create huge job opportunities in the petroleum sector. A few other sectors, like business services, education services and pharma can also give comparative wage advantage to India, which according to economic researchers Dingel and Neiman, can completely shift to the work from home (WFH) mode. They used two Occupational Information Network surveys to estimate share of jobs that can be done at home in each occupation type. Combining these facts and adding information into the social accounting matrix  (SAM) framework can observe an additional 11 lakh employment opportunities. SAM is a comprehensive accounting framework within which the full circular flow of income — from production, to factor income, to household income to household demand and back to production — is captured. These estimates show that petroleum, pharma and the business service sector can add 6,89,616 and 81,092 and 4,04,630 new jobs respectively post-Coronavirus. These estimations are based on moderate expectation of five per cent growth in exports in these sectors.

For all these to happen, India needs to start some economic activity as soon as possible, preferably by May 3, even if partially. Hotspots can be identified and locked down till the spread is contained. The Government should not shy away from providing relief to vulnerable sections. The important thing is that as soon as India can get back to normalcy it can reap the advantages of a slack in global demand in a number of sectors. Petroleum is the prominent one but there are sectors like pharma and services which will have a comparative advantage in the post-lockdown period. The need of the hour is to identify such domains and quick-start those activities.

Again, in a nutshell, India’s strategy should be to get back to normal as quickly as possible by using more resources; spending entire resources on the hotspots (tests, tracking and isolation); providing wage-coupons to daily wagers to contain them in the hotspots; inter-sectoral transformable skilling; identifying potential sectors and encouraging start-ups to harness WFH advantage to boost exports.

(Writer: Arijit Das; Courtesy: The Pioneer)

No Comments so far

Jump into a conversation

No Comments Yet!

You can be the one to start a conversation.

Your data will be safe!Your e-mail address will not be published. Also other data will not be shared with third person.