Well, its been a long since I wrote my last post on Indian Economy. At that time the stock
market was booming and I explained how the subprime crisis was proving to be a boom for
India. At that time India was a darling of the investors worldwide and dollars were pouring in.
Not any more. The tide has reversed. Today the Sensex closed below 13,000. Its lowest this year.
A state of gloom has engulfed the market.
What actually has happened ?
Well unlike the falls of the past, the current decline of stock market is related to many factors.
The oil prices are touching new heights everyday. The costlier the oil, the costlier will be all
those things that depends on it. Right from the Cooking Gas-the very basic item to the cost of
airfare - everything has shot up. The transport costs of goods, the production costs in factory and
everything in between - all has shot up. And this is the situation of almost every country in the
In the US, they don’t give subsidy on oil, so the real world market prices are prevailing there. As
a result, people have started using the oil in the most efficient way possible. It has become a rare
commodity. New innovating methods of transport are being invented, the demand for big SUV
has fallen sharply. The whole America is in a cut cost on oil mood.
However, nothing like that sort is happening in India. Here the Government kept oil prices
artificially low and provide subsidy to the customers. This is done by forcing oil companies to
sell oil an a price which is lower than their actual cost. As a results oil companies are loosing
everyday. Their estimated loss is Rs. 50 crore (Rs. 500 million) per day ! The loss of companies
are compensated by giving them oil bonds. However, as the global oil prices are increasing
everyday, it will not be possible for Government to keep oil prices artificially low for a long
time. The buck will have to be passed on to the consumers. If the oil price increase continue like
this, the under-recoveries of the oil marketing companies could soar this year to Rs 150,000
crore (ie. Rs. 1500000 million), or 3% of GDP.
Adding fuel to the fire is the overall increase in the prices of other essential commodities. The
prices of Fertilizers, which are so important for a good harvest in India, have touched the sky.
Since Government can not afford to pass this price rise to poor farmers, it will have to bear the
cost by giving subsidies. The situation on fertilizer front is worse than oil. The world price of
urea, which was only $175/tonne in 2004, rose to $288 in April 2007, and $415 in early April
2008. Diammonium phosphate (DAP) shot up from $252/tonne in early 2007 to $752 in January
2008, and is now almost $1,300/tonne.The price of potassium chloride, a potassic fertilizer, is up
from $270/tonne last year to $620/tonne.
Apart from oil and fertilizers, the prices of food grain have also shot up considerably. The
inflation is at an all time high level. All these factors will result in a huge subsidy bill that will
eventually result in a big fiscal deficit. The government can not take the risk of increasing prices
sharply in view of the coming next-year election. The only remedy left with government is to
heavily borrow from the market to pay its subsidy bill. Hundreds of thousands of crores of bank
funds will be diverted from productive purposes to subsidies. Companies will find that credit is
not available, except at high interest rates. Economic growth, which is already being slowed by a
global recession, will slow down further.
Further, there will be additional costs of the 6th Pay Commission whose recommendations will
be implemented this year. Though marginally, the increase in the salary of government
employees will also affect the Government’s credit standing while emptying its coffer a little
The interest of FIIs (Foreign Institutional Investors) in Indian Stock Market has already
diminished. As the entire global economy is in a recession phase, most big investors are
preferring liquidity over tangible investments. No wonder billions of dollars have been pumped
out of Indian Stock Market in the recent few months.
One more bad news is coming from Middle East where there are reports of a possible Missile
attack by Israel (with the backing of US) on the suspected nuclear facilities of Iran. If this
happens, it will shoot the oil prices further as Iran may adopt any course of action in retaliation
like stopping its oil production or destroying oil carrying ships in the gulf. Though the US is least
likely to ask Israel to go for an attack on Iran given its own tight situation on oil at home, you
never know what can happen in th nest moment. Remember this is the last year of George Bush’s
tenure. He can do the most unpredictable things.
So, as explained above, the overall economic scenario in India is not very bright. I don’t know
for how long this phase will last. As of now, we can only pray that the situation improve soon.
Only God knows what’s in store for India. Meanwhile be prepared for the tough times.
Indian economy inflation oil prices sensex share stock marker subsidy