“Haven’t prices of petrol and diesel come down? Have you not been saving more? My critics say Narendra Modi is lucky… If my good luck can bring down prices of petrol, diesel and save you money, then why bring in the unlucky ones?”
This was Narendra Modi before Delhi polls that eventually was won by Kejriwal and BJP was reduced to the ashes. The voters of Delhi ultimately decided not to opt for Modi’s luck and in turn ended up strengthening Kejriwal’s luck.
A lifestyle coach of repute once quipped:
“The amount of good luck coming your way depends on your willingness to act.”
Undoubtedly several crores of Indians would wish luck to Mr. Modi for his stars to align properly and usher in an era of growth and peace in India but governance and economic growth cannot ride on fortune alone. The following are some inter-dependent yet significant circumstance’s that could upset the apple cart for Mr. Modi who is already dealing with a double edged sword in the form of vociferous allies and an even raucous opposition that isn’t willing to concede the slightest of space for Modi in the legislative arena.
1. Increase of oil prices and its Domino effect in the global economy
Mr. Modi should thank “Fracking” not his stars!!
The brightest star that set the perfect alignment in Modi’s horoscope was the “Fracking” star!
Oil barrels that were tagged above 100$ at a time when Manmohan Singh was the Prime Minister have now plummeted to around 50$ a barrel. When Mr. Modi was talking of his solid luck, this is what he was indicating precisely. Our country that is in the top oil importers of the world is a huge beneficiary at this turn of events.
The various reasons for this can be attributed to slower demand from Asia (especially China) and a boom of Shale based gas production called “Fracking” in the United States of America from the Dakotas to Oklahoma and Washington to Texas. So much so that a loud mouthed small time politician once proclaimed he wanted to witness several oil rigs lining up patches of empty lands like street lamps, at every nook and corner across the prairies and Great Plains of Oklahoma in America during the start of the fracking boom in America.
One statistical indicator shows that every $10 reduction in a barrel of oil reduces the fiscal deficit by 0.1% of the Indian economy. This chain of economic linkage thus reduces inflation, leaves more in the pockets of the common man. Barring a few sectors like exports to oil producing countries, inward remittances to India, mostly it is a reason for celebration across the Indian markets.
So let’s play the devil’s advocate and see on the flip side if there were a reverse in these oil prices how it might impact the Indian economy and the budget.
Right now countries like India (mostly) and China are partying in a suite that was occupied by countries like Russia, Venezuela and the OPEC (Organization of Petroleum Exporting Companies) who were kicked out by the falling gas prices. But various factors like the ever volatile geo-political situation in the Middle East (always waiting for a slight spark to ignite) and American Foreign Policy (especially with Russia and Putin trying to needle America) can quickly change with the turn of these events. If the gas prices increase to 70$ a barrel then India’s imports might still be affected with the pinch being felt on the pockets. Any further increase in the oil prices like 100-120$ a barrel would make India deplete its valuable foreign exchange reserves.
The inflation would increase by several basis points leading to higher prices of general commodities, food products and several other essentials for construction and infrastructure development. The interest rates could increase further making borrowing costly, impacting the whole consumer cycle of spending and growth. This would also make borrowing tighter for companies, businesses and industries, especially the real estate sectors impacting further progress. There would be excessive fluidity in the Indian markets.
Indian companies, banks and the government will find it very hard to get loans in the west. As a further consequence of this if RBI raises interest rates then again Indian companies, banks and the government will find it hard to get loans within India.
Prolonged periods of high inflation during the sunset of the Manmohan Singh government can erode household budgets, reduce the purchasing power of the poor and affect growth, investments in India.
And this would no doubt affect the electoral prospects of BJP in the election bound mega states of Bihar, UP etc. which are crucial for Modi to cement his power. He is currently struggling to pass any laws of stature to spur growth and improve the ease of doing business in India, due to the lack of numbers in the upper house (Rajya Sabha) who are indirectly elected by the legislators of their respective states.
Right now there is a ‘who blinks first’ kind of tussle between the OPEC and the US (with its abundant Fracking companies that are viable with oil at only a certain rate).
How this global tussle for oil revenue control plays out is definitely one factor the Modi Sarkar’s “Acche Din!” needs to watch out for!”
2. Hike in the US Federal Interest Rates and the subsequent domino effect
Janet Allen may be the one of the factors to be appeased by Mr. Modi’s astrologers for his continuing good luck!
The US job market scenario is improving. Every month the report seems to brighten up further. The impending summer also will see an increase in consumer spending and gas prices driven by a domestic consumption (Americans like to drive a lot in the summer). The house prices are again rising fuelled by all these factors. A townhome in the Washington DC suburban metropolitan area that fell by more than 30% after the start of the 2008 recession is again inching up to its pre-recession levels. All this activity is bound to heighten the interest rates sooner or later.
While it can be debated as to how much India is aligned to weather out any future rate hike by the US Federal reserve, things have definitely improved since the past decade or two. The sheer magnitude of the Indian economy might be a stabilizing factor but to what extent needs to be ascertained. The government and budget 2015 have taken certain steps in the direction of an investment driven growth but to what extent all of this would insulate the Indian economy from a US Fed rate hike, only time can tell.
So let’s play the devil’s advocate here and see what might happen if the investment driven growth as kicked in by Mr. Jaitley’s 2015 budget does not sustain enough momentum due to various legislative compulsions that the Modi government is facing right now.
The Foreign Institutional Investors (FII’s) and Foreign Direct Investors (FDI’s) would definitely make a beeline for the “greenbacks” once the US Economy is in full steam. The Indian Rupee would depreciate and with an increasing fuel prices (just as seen in the factor above) it would be a double jeopardy. The Indian Rupee would fall drastically against the dollar as seen in July-August 2013. The impact on commodities prices would be substantial due to the increased fuel prices, depleting foreign reserves, decreasing growth, increasing inflation, decreasing ease of foreign credit and thus the whole domino effect.
The Reserve Bank of India (RBI) would have to kick in to tame inflation. While some export sectors like Software etc. might benefit, the imports would suffer in a major way. The Foreign Institutional Investors (FII’s) of the world (including India) would flee from the Bombay Stock Exchange (BSE) that is seeing a dream run like Sharukh Khan’s Bollywood movie DDLJ since the Modi government’s inception.
How much the US economy and dollar strengthens vis-à-vis other economies of the world is another important factor the Modi Sarkar’ “Acche Din!” needs to watch out for!”
3. The Weather factor in India’s agricultural output
The weather gods may have to be definitely appeased by Mr. Modi’s astrologers to ensure the spell of his good luck!
The unseasonal rains, hail damage in Punjab and Haryana recently have affected the winter Wheat and Mustard, Rabi crops to a great extent, besides its effects in parts of central India.
The Rabi season in Rajasthan, MP and UP have also been effected due to such intemperate weather, water logging and high winds. In Maharashtra vegetables such as cauliflower, tomato and coriander were the worst affected.
So playing the devil’s advocate any such major climatic aberrations in the future can impact the food prices thus kick starting the whole stream of Inflation.
Indian agricultural economy can be safely termed as one that is dependent to a large extent on monsoon rains which can play havoc if they swing to the either extremes. A bad or excess monsoon will still have an effect on India’s GDP albeit the extent to which this may effect cannot be negated completely in the near future.
Events like the cyclone Hudhud which pummeled the city of Vishakhapatnam last year are also a huge loss to the exchequer.
So how the rain god’s play is also a crucial factor the Modi Sarkar’ “Acche Din!” needs to look out for!
For Modi Winning elections, satisfying the voter base and the industry captains simultaneously is indeed like a double-edged sword. Any extreme like privatizing even the profit making Public Sector Units (PSU’s), selling railway land etc. will only end up playing into the hands of the capitalists. Their intentions were best summed up by the Wall Street Journal article that called Modi’s 2015 budget as mediocre. While on the other hand sticking to draconian and growth paralyzing laws like the land acquisition bill without any changes will stunt any form of 8-9% growth and (How will factories be setup, roads be built, power plants shall be developed, where to mine minerals ?) any form of development in India.
In spite of all the good work done by Modi Sarkar the largely urban electorate of Delhi rejected BJP who seems to be stuck between the devil and the deep blue sea.
In this catch 22 situation Narendra Modi needs to walk a tightrope and will definitely need all the luck he can ask for, maybe in the form of a Raghuram Rajan like Paul Volcker was for Reagan? Although with a happy ending unlike Volcker who was dropped mid-way by Reagan!
By: TheIndianMuse (@theindianmuse )