But global commodity crash offers big opportunity
Given the number of times IMF forecasters have got it wrong—the latest World Economic Outlook (WEO) has a separate section on this—it is very likely that even the lowered forecasts of global growth may not come true. In April 2013, the WEO was looking at a 4% global growth rate for 2014, this was lowered to 3.6% in October 2013 and, a year later, it is at an even lower 3.3%. Though the WEO has been quite optimistic on Europe, the largest mistakes in forecasting, interestingly enough, are those relating to emerging and developing economies, largely due to unwarranted optimism about local investment levels rising. What is more critical for countries like India, WEO estimates of global trade growth have been slashed from 5.3% in April 2013 to 4.9% in October 2013 and a much smaller 3.8% today—global trade even turned negative for a while during the first half of 2014. More worrying, and the WEO reiterates much of the same fears expressed in other quarters, is the impact of the abundance of liquidity—from the various phases of QE in the past—that has resulted in the near absence of fear in the markets.
To take oil prices, for instance. The fact that US oil production has jumped while oil demand growth has slowed is certainly a factor in lowering prices—and the winding down of QE means there is less speculative inflows into crude markets—but the fact that heightened global tension has not affected the markets is worrying. In other words, the IMF is indicating that, there is the possibility that, once US interest rates start rising, markets could get spooked. Another IMF report, on the growth of shadow banking, points to spikes in asset prices getting aggravated—with a liquidity mismatch, since shadow banking is financed by short-term money, this could worsen once US rates rise. In which case, from India’s point of view, RBI needs to accumulate as much forex as possible to ready itself for US rates rising.
The good news for India is the likelihood that commodity prices are on a secular decline. While crude oil prices are down 1.3% from 2013 to $102.8 in 2014, this is projected to fall to $99.4 in 2015 and $97.3 in 2016. Metal prices are down 7.5% in 2014 and are expected to fall further by another 1.8% in FY15; food prices, similarly, are down around 9% already since March 2014. While low commodity prices will help keep the import bill down—they will, of course, also lower export realisations—if this is followed up by some domestic changes such as raising prices of natural gas and opening up the coal sector to commercial mining, India has a very good chance of lowering this further. The resultant increase in capital spending—Reliance-BP themselves had committed to spend $8-10 billion if natural gas prices were raised—would also give a big fillip to GDP growth.