Despite the sharp 55% fall in global prices of crude oil, and the resultant surplus this will yield in oil importing countries, the IMF lowering its 2015 growth forecasts by 0.3 percentage points is bad news for countries like India. Not surprisingly, the only real growth engine left is the United States with the economy expected to grow a stupendous 3.6% in 2015, which is a 0.5 percentage point hike since the last World Economic Outlook in just October 2014—and with investment back and household balance sheets repaired, even 2016 growth is estimated at a healthy 3.3%. While the euro area growth has been lowered 0.2 percentage points to 1.2%, chances are that may have to be revised downwards. Japan continues to remain anaemic but the real worry is China where growth has been lowered further by 0.3 percentage points to 6.8%. Not surprisingly, there is a sharp collapse in the growth of oil exporters like Saudi Arabia which has seen a 1.6 percentage point cut in its 2015 forecast.
The India numbers look surprisingly robust despite this, at 6.3%, but need to be put in perspective. While the collapse in oil prices has an obvious impact on the current account deficit (Citibank’s CAD estimate for FY15 is 1.2% of GDP), the IMF estimates are also predicated on a pick-up in industrial activity after the new government started working on policy reforms and on reviving stuck projects. To be sure, there is some momentum and just the restarting of mining operations will add impetus to economic growth, and to demand for commercial vehicles.
But as the latest set of quarterly results show, net sales of the early birds are down 12.3% in the latest quarter—this is partly exaggerated by the fall in revenues of oil producers, but others have also seen a sharp slowing of demand. And the lack of pick-up in bank credit shows that the projects getting ‘cleared’ isn’t really helping the investment cycle. What is also worrying is the continuing tempering down of global trade volume estimates. For 2015, these have been cut by 1.1 percentage points, to 3.8%. Considering the last trade growth estimates were made just 3 months ago, that is a sharp fall, undoubtedly accentuated by the Chinese slowing—the prospects of a hard landing can’t be ruled out —and the collapse in OPEC economies; import projections for emerging and developing markets are down nearly half since October. It is in this context that the recent comments by India’s chief economic advisor Arvind Subramanian need to be kept in mind. At a recent summit, he pointed to the US’s flagging commitment to open trade. Of course, if India wants the US to open its markets further, it too will have to make important concessions to US firms, and has been pointed out by various US CEOs, a lot of their projects continue to remain mired in red tape.