Global commodity price hike can upset growth math
Though early-bird corporate results do suggest some increase in top-line numbers, a series of data from the PMI to the IIP and imports suggest the recovery theme may be overstated. IIP collapsed in March after surprising with a 2% growth in February, PMI fell from 52.4 in March to 50.5 in April and, most worryingly, imports contracted 23% in April, on top of a 22% contraction the previous month—exports continued to decline for the 17th straight month, a sign of both poor global conditions as well as India’s poor competitiveness. Through all of this, government spokespersons have explained the higher GDP growth by talking of value addition—sure, they argued, the top-line was not growing, but since input prices were falling faster, there was value addition, which is what GDP is all about.
Some part of that argument will now fade as, with global commodity prices rising steadily over the past few months—at close to $50 a barrel, oil has risen 83% over January lows—the days of commodity price deflation could well be over. That, of course, is the reason why after so many months, India’s WPI is finally in positive territory. HSBC’s chief India economist Pranjul Bhandari points out that, after the Global Financial Crisis, global commodity prices plummeting for a few quarters lead to a similar divergence between input and output prices and threw up an exaggerated manufacturing growth of 11.3% yoy in FY10, only to ‘crash’ to minus 3.1% two years later as prices began to normalise—what she imaginatively called ‘hello from the other side’. While most will interpret manufacturing GDP normalising and tracking the action on the ground more accurately as a weakening of the growth impulse—something Bhandari warns against—increasing commodity prices will have an impact on the fisc. The last two years of oil prices falling have allowed the government to reap a tax bonanza and, in the absence of meaningful oil reforms, also present a low subsidy bill and a balanced fisc—this will now change. Apart from the pressure on subsidies, higher taxes will have to be sacrificed to keep consumer prices constant which, in turn, will cap government spending to stimulate the economy. Commodity producers will benefit theoretically, but most are too leveraged to benefit unless there is a surge in prices. For a government about to celebrate its second anniversary, that’s a damper though the good monsoon will compensate a bit for the slowing manufacturing and the slower government stimulus.