Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Economic turmoil on the horizon? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 8, 2000

    Economic turmoil on the horizon?

    Well, this is not exactly an overstatement. Maybe a little overboard but once one considers the fallout of certain international developments on the economy, things do start to look gloomy. Not that we are pessimistic about the economy's resilience. Just that it is difficult to believe (and history supports this) that our politicians will be able to come out with policies to effectively tackle this issue.

    The international development we are referring to is the surge in crude oil prices, currently at levels reached during the Gulf war. The government, so far, and expectedly, has failed to take effective measures to curb the fallouts of this development. We look at the two primary effects of rising crude prices, which will almost certainly have implications for each and every segment of the Indian economy.

    The first is inflation. Higher crude prices imply higher price of finished products like diesel, petrol and kerosene. In Indian however finished product prices have failed to move in sync with crude prices largely due to a mechanism that absorbs the effect of these price variations. This system is known as the Oil Pool Account. As prices have tended to move only one way, there has been an accumulation of a large deficit in the oil pool account. The deficit continues to grow as the government has failed to raise the administered prices of finished products.

    Now, however, it is increasingly clear that prices need to be raised (the extent of the rise may be still lower than what is necessary). And as oil products serve as key consumption and feedstock materials, the effect of the price rise will be felt in most commodity/product prices. And given the fact that Indian companies are just coming out of a slowdown, it is unlikely that they will be in a position to absorb the inflation in costs. Inflation, which has already increased significantly over the last seven months, will once again get a boost. Higher inflation, needless to say, will have adverse implications for the entire economy.

    The other adverse development that is likely to be triggered by rising crude prices is an enlarging of India's trade deficit. Last year, India imported over US$ 10 bn worth of oil at an average price of US$ 18. This year imports are likely to be even higher at US$ 16 bn. Although exports have been rising, and at the current account level software exports will provide a cushion, fallout in terms of volatility in the forex markets cannot be ruled out (depreciation in the value of the Rupee will again have implications for inflation). Such developments, as witnessed in the past, could lead the government to take decisions, which may not be in the best interests of the business sector.

    There is also a need to highlight a third factor, which has been triggered by the government's indecision regarding tackling higher crude prices. This refers to the deficit in the oil pool account. The fiscal wizardry adopted by past governments ensured that this deficit does not reflect in the national accounts. It is ‘off balance sheet’. Nevertheless the deficit needs to be met by either raising prices or by finding ingenious ways of transferring funds from the national accounts to the oil pool account. Either way, the effects are likely to be adverse, as it is the end consumer that is likely to suffer (someone needs to ask what happened to the government's plans of raising domestic crude output!).

    The stock markets seem to have ignored the fallout higher prices on the economy for now. However, if the rise in crude prices sustains, one can expect some hard decisions. Then maybe it will be difficult to ignore this potentially turmoil inflicting development.



    Equitymaster requests your view! Post a comment on "Economic turmoil on the horizon?". Click here!


    More Views on News

    Insider Leaks Equitymaster Stock Picks (The 5 Minute Wrapup)

    Jul 25, 2017

    Equitymaster HQ has been infiltrated. Valuable stock ideas have been leaked. Who's responsible?

    Raymond and Other 'For Profit' Companies Who Don't Care about Shareholder Returns (The 5 Minute Wrapup)

    May 27, 2017

    What happens when minority shareholders are short-changed in the normal course of business?

    Why Commission Driven Model In Mutual Funds Should Be Eliminated... (Outside View)

    Feb 15, 2017

    PersonalFN believes SEBI has taken a step back-apparently in the admission of it going overboard with the regulations.

    This Book Changed How I Looked at the World of Man and Money (Vivek Kaul's Diary)

    Aug 24, 2016

    And here's your chance to claim a free copy of this book...

    The Developed World is Dying because of Demographics, Debt, and Deflation (Vivek Kaul's Diary)

    Aug 12, 2016

    And Why India's demographic dividend could turn out to be a doubtful debt...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms