Dr Bharat Jhunjhunwala
The price of a barrel of crude oil has plunged from US Dollar 140 to USD 30. One stream of economists holds that this will be harmful for India. Economies of oil exporting countries such as Saudi Arabia will come under pressure. They will not be able to employ Indian workers in large number. The remittances sent by our workers will decline. We will also not get foreign investment being made by the Sovereign Wealth Funds of oil exporting countries. These facts are correct. However, they ignore the fact that the remittances received are only a fraction of the huge payments being made by us for importing costly oil. Focusing on remittances and foreign investments is being penny wise pound foolish.
This fall is being attributed to declining demand from China. That is indeed true-but only superficially. Question is why is China’s demand declining? Reason is that the developed countries are not buying increasing amounts of goods from that country. That too is a superficial explanation though. Why is the demand from the developed countries declining? Reason is global equalization of wages. Rapid expansion in global trade led to manufacturing activity shifting from the developed countries to the developing countries like Bangladesh, China, and India in the last two decades. Presently the provision of services is shifting to the developing countries, especially India. It has become possible to supply garments and Call Centre services from India. In the result, workers of the developed countries are losing their jobs. Their earnings are under pressure. They are not able to buy cars, TVs, toys and garments produced in China. This has led to reduced demand for Chinese goods. That, in turn, has led to reduced demand for oil and other commodities like iron ore from. That is the correct explanation for the present decline in oil prices. The decline in demand from China is likely to stay for quite some time because it is arising from basic readjustment of global economy.
How do we explain the very healthy job data coming out of the United States then? These jobs are not being generated from market-driven activities. The US has been losing its competitive edge for more than two decades. This fundamental trajectory of the US economy is being overshadowed by increasing Government expenditures. The US Government is borrowing huge amounts from the global market. This borrowed money is being used to pay welfare benefits to those losing their jobs; and for waging war in Syria. Jobs are being created in these debt-driven activities. Two opposite forces are, therefore, at play. Globalization is leading to loss of jobs but debt-driven expenditures are leading to creation of jobs. The United States and European Union have become one of the most heavily indebted economies today. Needless to say, such debt-driven growth cannot sustain for long. Fundamentally, the developed countries are losing their competitive edge and going downhill.
The decline in the price of oil will be hugely beneficial for us. The Government has already increased the taxes on oil. The price of oil for the consumer has not declined in tandem with the decline in the global price. The domestic price of petrol was about Rs 75 per liter when the global price of crude oil was USD 140. The domestic price of petrol is today about Rs 60 per liter when the global price of crude oil has crashed to USD 37. A 75 percent decline in global price of oil has been accompanied with a paltry 20 percent decline in the price of petrol for the consumer. Main reason for this is the increase in taxes. Previously, the Government was providing subsidies on imported oil to keep the domestic prices low. Today the Government is collecting taxes on imports of oil.
This policy of the Government is welcome. We have become hugely dependent on imports of oil. Reduction of price of petrol and diesel for the consumer would lead to increased consumption of these items. That would make us even more dependent upon imports and put our economic sovereignty into peril. Higher price of oil will reduce our dependence on imports.
The Government policy has to be faulted at another level. The taxes are being used to reduce fiscal deficit; and not to increase the desperately needed expenditures. The taxes should be used for developing alternative sources of energy such as solar power so that this windfall income helps us come out of dependency on imported energy. There is also a dire need to increase public investments in highways, ports, e-governance, etc. These expenditures would work like lubricants and take our economy to a high growth path. Instead the Government appears to have a single pointed focus on controlling prices. Therefore, the Government is not making the required expenditures and the economy is under stress. The correct policy was to use the increased tax receipts from oil to increase necessary expenditures and to take the country to greater heights.
It is being said that the reduction in the price of oil will be harmful for India because of lower remittances. This is a flawed argument. Let us say the global price of oil increases and we pay Rs 100 extra to Saudi Arabia for imports of oil. Saudi Arabia employs our workers with this income. The workers send remittances to India. I reckon that the remittance sent to India would hardly be Rs 5. We pay Rs 100 and get Rs 5. It would be much more beneficial to impose a tax of Rs 100 on cheap oil. Then we will get Rs 100 instead of Rs 5 that we will get from remittances. The same logic holds for inward foreign investments. We get back a fraction of the payments made for importing oil from these investments. We can get ten times that money if we impose taxes on imported oil.
The decline in price of oil is a bonanza for India. We must impose taxes and use that revenue to make public investments to jumpstart growth and to reduce our dependence on imported oil. The Government has gone one half in the right direction. Taxes have been imposed on imported oil and domestic price has been maintained at earlier high rates. However, the money obtained from these taxes is being used to cover the fiscal deficit of the Government instead of investing in building a secure future for the country.
(The author was formerly Professor of Economics at IIM Bengaluru).
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