Alert: Narendra Modi's Best Friend Is Stabbing His Back Right Now

May 21, 2018

Ankit Shah, Research analyst

This has nothing to do with Karnataka state assembly elections.

In fact, this election was a non-event.

Also, I'm not referring to Amit Shah. Or any of Modi's close aides in the BJP.

Not even Rahul Gandhi. (Though I do believe that he is one of Modi's best friends).

And this doesn't just concern Mr Modi. It concerns you and your stock portfolio too.

So, who is this best friend who is now betraying Modi?

Any guesses?

I'm talking about crude oil prices.

Before we get to the betrayal part of the saga, first let me explain why I call crude oil Modi's best friend.

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Let's rewind back to 2014...

It was May 2014 when Narendra Modi took charge as the Prime Minister of India.

Look at this chart...

Will Rising Crude Oil Prices Steal the Modi Magic?

At the time, crude oil prices had been firmly above the US$ 100 per barrel level.

But as luck would have it, crude oil prices started crashing right after Modi came to power.

Between May 2014 and January 2016, crude oil prices crashed 74%.

This gift of lower crude oil prices was the biggest boon to the Modi government. (More on this in the Chart of the Day.)

Remember that crude oil is a very important fuel for India's economic engine.

India relies on imports for about 80% of its oil requirements.

So, India's crude import bill is huge. It has a big impact on our current account deficit, fiscal deficit, inflation, GDP, among others.

The sharp drop in crude oil prices corresponded with declining inflation.

This, in turn, allowed the RBI to lower interest rates.

Such a benign inflation and interest rate environment was ideal to revive the investment cycle and the economic growth engine.

But now, just when the economy is on the verge of revival, Modi's 'best friend' is betraying him.

Crude oil prices are rising rapidly.

Last Thursday, Brent crude oil prices shot above US$ 80 a barrel.

This is the highest level since 2014. In the past one year alone, oil prices have surged more than 50%.

Rising crude oil prices could act as a spoke in the wheel of India's economic recovery.

Inflationary expectations could drive the RBI to raise interest rates.

A higher crude oil bill will result in a wider current account and fiscal deficit.

All of this could leave Mr Modi in a very tight spot given that the next general elections are just a year away.

You see, crude oil prices are very tricky to guess.

Geopolitical factors have a huge bearing on the supply of this critical commodity. Very few experts have a decent grasp of what goes on in the oil industry.

Thankfully, at Insiders (my premium newsletter), I don't just have access to the best investing and trading ideas from Equitymaster's research vault, but I also have access to a stream of fantastic insights from our global intelligence network.

A couple of weeks ago, I'd shared with my Insider readers some fantastic insights about oil prices and geopolitics of the Middle East by Nick Giambruno of Casey Research. Nick had been accurately predicting higher oil prices since a couple of years.

I'm listing some takeaways from the interview...

  • The Middle East accounts for more than 80% of global oil reserves and about two-thirds of the world's oil supply.
  • The Saudis used to want lower oil prices because they believed they could put their enemies, U.S. shale oil drillers, out of business. But that didn't work...
  • OPEC and Russia are now slashing production to drive prices higher...
  • The civil war raging in the Syria is about to morph into a much more dangerous regional war.
  • Whenever we see big conflicts like this in the Middle East, we also see big spikes in the oil price.
  • If things get extremely worse, we might even see a repeat of the 1970s oil crisis... when oil prices spiked more than 240% over the span of about two years.

Now, I really hope and pray such an extreme scenario doesn't play out.

But even if the current trend of rising crude oil prices continues, it could have India's PM sweating.

It could also have a domino effect on the rest of the economy.

And most importantly, it could push your stock portfolio deep into the red.

Chart of the Day

Here's Why Crude Oil Was Modi's Best Friend So Far

Look at this chart...

It shows India's total import bill of crude oil and petroleum products on an annual basis. I've marked India's oil import bill during the Manmohan Singh regime and the Narendra Modi regime.

What pattern do you notice?

Clearly, the Modi government has been a big beneficiary of lower crude oil prices.

During the UPA II regime, India's average annual oil import bill was US$ 133 billion. In fact, in the last three years of Manmohan Singh's leadership, the oil import bill exceeded US$ 150 billion. Compare that with an average annual oil bill of US$ 95 billion during the four years of Modi's leadership.

The actual savings would have been even higher, because I believe the consumption of crude oil and petroleum products would have been quite higher in the Modi era than the Manmohan era.

Last Thursday, Brent crude oil prices shot above US$ 80 a barrel.

This is the highest level since 2014. In the past one year alone, oil prices have surged more than 50%.

Now, what if oil prices go back to the levels during the Manmohan Singh regime? What would happen to India's current account and fiscal deficit? What would happen to inflation and RBI's stance on interest rates?

With the next general elections just a year away, rising crude oil prices are going to be a big worry for the Modi government.

It should worry you too...


Ankit Shah
Ankit Shah (Research Analyst)
Editor, Equitymaster Insider

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3 Responses to "Alert: Narendra Modi's Best Friend Is Stabbing His Back Right Now"


May 31, 2018

One wonders what happened to production of U.S.shale oil which was the main reason for oil prices to crash.


Gautam M

May 21, 2018

We seem to go into the boom and despair cycle very easily. At one point in time not too far away (just couple of months back) the world was dreading of a nuclear war with leaders calling each other animal names and button sizes. Then suddenly we found the same leaders dangerously close to being nominated for Nobel peace prize for preventing the world from a nuclear war. So let us not get too much excited on how much the crude oil can hit the peak. True that India with its huge dependence on crude just like China will be hit but some way will emerge out of this mess as well. Also in the graphs you did not show the crude level when UPA 1 was in power. I am sure it will not be too different from Modi's current spell.



May 21, 2018

Just because of crude oil all macro economic indicators were looking good and stock market boomed. What will happen when crude changes direction? This is my personal view that we should have used that time to clean up bank balance sheets. Now most of the banks who lend to corporate has huge NPAs. Who will now lend to corporate and from where growth will come from? Any ideas?

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