Oiling reform wheels

One single international development that has not received the kind of play it deserves in the Indian media but is keenly watched in policy-making and strategic circles is the falling prices of oil – despite the geopolitical uncertainties in the Middle East and Nigeria –whose impact could be felt in government finances, business, trade and consumer spending, if the trend continues.

The price of oil has plunged by more than a quarter since June. It is holding above $80 a barrel. Analysts ascribe quite a few reasons for the slide in prices – a threat of recession in Europe, cooling off of growth in China, the shale boom in the US and steady production from OPEC member-states. And all these hold considerable significance for India's economy and diplomacy.

Low priced oil was the engine of growth in post-War World and as recently as that of 1990s. On the flip side, the fall in oil prices in the 1980s battered the Soviet economy and led ultimately to its disunion. The crash in prices now has enormous implications for hydrocarbon-dependent economies like Russia, Iran, Venezuela, and even countries in the Middle East, which since the Arab spring have raised their public spending. Because the business of oil is not exactly business alone.

Over the decades, oil has been a highly political commodity, a critical element of cooperation and conflict in international relations. It has had a role in important developments like the oil crises of the 1970s, petrodollar recycling, Third World indebtedness and the two Gulf Wars of 1991 and 2003, the Kyoto Protocol and the Copenhagen negotiations on climate change.

In the current scenario, some analysts see a clear mix of geopolitics with the energy business.

Columnist Thomas Friedman goes to the extent of saying that the low price of oil has “the feel of war by other means,” a potent US weapon against Russia, which is not on good terms with Washington over Ukraine, and Iran, which is negotiating a deal on its nuclear programme before the November deadline. There is also talk of President Barack Obama considering lifting restrictions on crude exports imposed in the 1970s. Some other analysts say the Gulf members of the OPEC cartel led by Saudi Arabia are driving down prices to retain market share and thwart the US move of driving them out of business with its shale gas.

However, in this high game of strategic competition, India seems to be a clear beneficiary as prices are said to remain depressed for the remaining months of the year, despite the approaching winter. India imports three-quarters of its oil and high oil prices have fuelled inflation and stunted the development of other sectors of the economy. Now sectors like transport, airlines and energy-intensive industries could breathe easy.

The government's subsidies bill on account of oil and fertiliser would see a fall, helping the fiscal situation. The trade gap could also shrink with the current account deficit under check. The fall in oil prices would also boost consumer spending as lower prices mean higher disposable income. And a lower inflation, in turn, could facilitate an easing of interest rates earlier than expected.

Thus, the lone international development of lower oil prices has made India's macro-economic scenario look much better than what it was a few months ago. Taking advantage of the situation, the government has deregulated the diesel price. And with success in the latest round of assembly elections, Prime Minister Narendra Modi may now feel emboldened to push through more reforms to lift growth.