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Freeze out Routinely freezing fuel prices is an
unfair and distortionary poll ploy One Tuesday, after possibly the
longest pause, of 137 days, in India’s retail fuel prices in recent years,
oil marketing companies raised petrol and diesel prices by about 80 paise a
litre, following up with a similar increase on Wednesday. A 50 rupees hike
was also affected in domestic cooking gas prices. Fuel prices were last
tweaked in November 2021, following the Deepavali-eve cut in petrol and
diesel excise duties. The interregnum between then and now, coinciding with
the five Assembly election battles, also witnessed the sharpest spike in
global crude oil prices among recent instances of price freezes in India’s
‘deregulated’ petroleum products market. From around $73 a barrel on November
4, crude prices are now around $110 after shooting past $130, immediately
after Russia’s invasion of Ukraine. Ordinarily, oil marketing companies reset
retail prices daily, based on an average of the previous 15 days’ global
prices for their preferred basket of crude. The Government has distanced
itself from fuel pricing decisions, asserting there was no official directive
to keep prices down. There is no evidence that oil firms had built up such
large strategic reserves at earlier prices that they did not need to react to
an over 50% cost surge for a commodity whose demand is met largely through
imports. That price hikes, in small doses, have begun only after government
formation in poll-bound States makes it abundantly clear that a nudge and a
wink from the majority owner of the state-runoil players had goaded them into
swallowing higher costs, compelling private players to follow suit to
compete.
Holding free market prices hostage to electoral politics, deployed
ever so often in recent years, including the last time these five States went
to the polls and the 2019 Lok Sabha campaign, is politically unfair,
economically untenable and reflects an extremely cynical state machinery
deployment tactic. That bulk diesel prices have been raised by 25 rupees per
litre to 122 rupees indicates that several more hikes are in the offing to
close the gap between costs and pump prices. Inflation, already above the
comfort level, may rise further and the Government may intervene with more
duty cuts at some point. But there are larger red flags to fret about. No
sane global investor will bid for Bharat Petroleum Corporation Limited, for
instance, if pricing freedom is effectively curtailed after an Election
Commission of India (ECI) briefing. This practice warrants wider
consternation, not only because it undermines a level-playing electoral field
in favour of the ruling dispensation but also opens the door for more such
creeping diktats or deviations from policy positions for temporary gains in
voter perceptions. Just as mysterious fuel pricing decisions have become par
for the course, other transient departures from stated policy can also become
governance habits. While governments are obviously tempted to create optics
of benevolence towards the common voter, the ECI needs to rise up to take a
firm stand on reversals or deferrals of routine decisions in poll season. Tired, and
retired As commerce sucks out the off-season
from the sports calendar, there is more burnout Athletes rarely retire in their prime,
not when they are numero uno in the sport. Tennis star Ash Barty’s sudden
announcement that she is quitting the game, at just 25, less than two months
after she won the Australian open and extended her hold on the top ranking,
has triggered shock waves within the tennis fraternity. For Australia, Barty
was more than a tennis champion; she is also a symbol of inclusivity because
of her indigenous ancestral roots. Aesthetics and grace defined her and
tennis could not have asked for a better ambassador. But fatigue and a loss
of motivation derailed her. Earlier, Naomi Osaka had spoken about dealing with
depression and taken a break from the sport while still in great form. At the
other end of the spectrum, the legendary Rafael Nadal seemed ready to fight
off age and injuries. But, even his indomitable will must submit to the
demands of his body, and he is now ruled out for four to six weeks following
a rib injury. His great rival Roger Federer is keen to extend his career into
his forties. But he will have to cope with the slow recovery from knee
surgeries. The real surprise is when the athletes feel low on motivation even
when they are in great shape physically, and in fine form with their game. In
the early eighties, Bjorn Borg, like Barty, retired in his mid-twenties after
tiring of the game mentally. Although Borg and Barty shocked the world with
their retirement decisions, they are not the exceptions in the world of
sports: Nadal and Federer are, as they push their body to extraordinary
exertion.
Sport can often juxtapose opposites, blending pulsating adrenaline
with mind-numbing tiredness. Be it a triumph or a debilitating loss, it is
played out in the open and it ushers in gargantuan expectations and immense
pressure. Away from the limelight, the sportsperson has to deal with frenetic
travel, cobwebs of the mind, sore limbs, and relentless scrutiny. The money
and the perks may be good but a heavy price is often paid. With sport having
become a commercial engine drawing top dollar, the athlete has to play all
through the year. The off-season, when rest and recuperation could be indulged
in, no longer exists. Barty’s retirement, which seems permanent unlike the
break she took in 2014, may not be the last exit. Unless sports
administrators show empathy, more sportspersons will seek an early closure.
Borg attempted a feeble come-back in the nineties; whether Barty will return
remains a matter of conjecture. For now, the shock is real, and tennis is
poorer. |
Global
uncertainties, India’s growth prospects Normalization of the economy has been
disturbed and the growth objective would be served by apt fiscal policy moves C. RANGARAJAN & D.K. SRIVASTAVA On February 28, 2022, the National
Statistical Office (NSO) released India’s GDP data for Q3 of 2021-22 along
with Second Advance Estimates (SAE) for 2021-22. Post COVID-19, the
normalization of the Indian economy has now been disturbed by the ongoing
geopolitical uncertainties. Growth
performance In the COVID-19 year of 2021-22, both
real GDP and GVA contracted by minus 6.6% and minus 4.8%, respectively. The
NSO’s SAE show that real GDP and GVA growth are estimated to recover to 8.9%
and 8.3%, respectively, in 2021-22. Despite this improvement, the magnitude
of real GDP at 147.7 lakh crore rupees in 2021-22 is only marginally higher
than the corresponding level of 145.2 lakh crore rupees in 2019-20. The NSO’s
GDP data highlights that in 2021-22, the nominal GDP growth at 19.4% is
significantly higher than the real GDP growth due to an inordinately high
implicit price deflator (IPD)-based inflation rate of 9.6%. Monetary policy
authorities need to take note of this.
The magnitudes of all demand components in 2021-22 have surpassed
their corresponding levels in 2019-20. However, the growth of consumption and
investment demand – as measured by private final consumption expenditure
(PFCE) and gross fixed capital formation (GFCF) in 2021-22 over 2019-20 is
only 1.2% and 2.6%, respectively, suggesting sluggish revival in domestic
demand. On the output side, the 2021-22 magnitude of the trade, transport
et.al sector, which has many contact-intensive segments, has remained below
its corresponding level in 2019-20 by 2.9 lakh crore rupees. Growth in the
construction sector in 2021-22 was at only 1.9% over 2019-20.
On a quarterly basis, both GDP and GVA show normalizing growth with
waning base effects. Real GDP growth moderated from 20.3% in Q1 to 5.4% in Q3
of 2021-22. Similarly, real GVA growth also fell from 18.4% to 4.7% over this
period. The implied Q4 GDP and GVA growth rates are estimated to be even
lower at 4.8% and 4.1%, respectively. Thus, without a base effect, quarterly
growth performance appears to be averaging at less than 5%. Assuming some
base effects to continue in the first two quarters, the annual growth in
2022-23 may not be more than 7%. Even this may not be realised due to the
ongoing geopolitical conflict. Crude upsurge
impact It is difficult to arrive at precise
estimates of the impact of the increase in global crude prices, but some idea
can be provided using the Reserve Bank of India (RBI)’s recent estimates
(2021) of the growth and inflation effects of an increase of U.S.$10/bbl.,
ceteris paribus. The estimated impact is a reduction in real GDP growth by 27
basis points and an increase in CBI inflation by 40 basis points. This is
based on using the baseline global crude price level of U.S.$75/bbl. For the
full year of 2022-23, we may consider an average global crude price of
U.S.$100/bbl. As a benchmark, although in the short run, it has already
surged to U.S. $123.21/bbl. (average Brent crude price for the week ending
March 7, 2022). An increase of U.S.$25/bbl. From the baseline price of
U.S.$75/bbl. Would lead to an estimated reduction in growth of 0.7% points
and an increase in inflation of nearly 1% point. With reference to baseline
growth for 2022-23 at 7% and CPI inflation at 5%, the revised levels of these
may be put at 6.3% and 6%, respectively, due to the impact of crude price
upsurge by an assumed margin of U.S.$25/bbl. Through the year. The impact would
be much larger if the margin of increase is enhanced. If the prices of other
imported commodities also increase, the inflation impact will be higher. Other challenges In regard to fiscal implications,
reference may be made to the budgeted nominal GDP growth forecast for 2022-23
at 11.1%. Assuming a revised real growth component of 6.3% and an IPD-based
inflation component of 6.5%, which may be slightly higher than the
corresponding CPI inflation, we may have a revised nominal GDP growth close
to 13.0%. Applying on this, a tax buoyancy of 1, the resultant Centre’s gross
tax revenues (GTR) would be higher than the budgeted magnitude of 27.6 lakh
crore rupees by a margin of about 3.2 lakh crore rupees. Alongside, there
would also be increases in some components of expenditures linked to prices
of petroleum products, including petroleum and fertilizer subside. The
Government should attempt to keep the fiscal deficit at the budgeted level.
Other economic challenges emanating from global uncertainties may include
a worsening of the current account balance due to higher import bills with a
depreciating rupee. A study by the RBI in 2019 had estimated an increase in
the current account deficit (CAD) following a U.S.$10/bbl. Increase in global
crude price, to be nearly 0.4% points of GDP. Thus, for an increase of
U.S.$25/bbl. In global crude prices, the CAD may increase by 1% point of GDP.
The RBI professional Forecasters Survey’s median estimate of CAD at 1.9% of
GDP for 2022-23 may have to be revised upwards to 2.9%. There would also be some sectoral
supply-side bottlenecks and cost escalation. Sectors that draw heavily on
petroleum products, such as fertilizers, iron and steel foundries,
transportation, construction and coal, would be adversely affected. Due to
the discontinuation of transactions through SWIFT, there would be some
disruption in trade to and from Russia and Ukraine. However, the respective
shares of imports and exports from these countries relative to India’s
overall imports and exports are limited. There would also be some adverse
effects with regard to financial flows. Net foreign portfolio investment
(FPI) outflows during October to December 2021 increased to U.S. $6.3
billion. Net foreign direct investment (FDI) inflows have also been falling during
this period although they have remained positive.
Policymakers may have to exercise a critical choice regarding who
bears the burden of higher prices of petroleum products in India among
consumers and industrial users, oil marketing companies and the Government.
If the oil marketing companies are not allowed to raise prices of petroleum
products, the bill for oil sector-linked subsidies would go up. If the
central and State governments reduce excuse duty and value-added tax (VAT) on
petroleum products, their tax revenues would be adversely affected. If, on
the other hand, the burden of higher prices is largely passed on to the
consumers and industrial users, the already weak investment and private
consumption would suffer further. If growth is to be revived, maximum
attention should be paid to supporting consumption growth and reducing the
cost of industrial inputs with a view to improving capacity utilization. The
Government may have to strike an appropriate balance among these options.
As developed countries are being forced to raise their interest rates
and inflationary pressures continue to mount in India and abroad, the RBI may
find it advisable to raise the policy rate with a view to stemming
inflationary pressures and outward flow of the U.S. dollar even as the growth
objective would be served by fiscal policy initiatives. Tracking the
persistent growth of China In the post-pandemic era, the country
is positioning itself to cause an unprecedented change in industrialization M. SURESH BABU “When the wind of change blows, some
build walls, while others build windmills.” In his speech during the plenary
session on ‘The Global Impact of China’s Economic Transformation’, Li
Keqiang, Premier of the People’s Republic of China lobbed this idea of facing
volatile economic situations. He was speaking at the annual meeting of the
World Economic Forum in Davos on January 21, 2015. Evident in the
numbers Since then turbulent winds have blown
in the form of trade wars and the COVID-19 crisis, and China has perhaps
created more windmills. In 2020, when other economies were struggling to cope
with the effects of the novel corona-virus pandemic, China’s manufacturing
output was $3.854 trillion, registering an increase from the previous year.
According to official data from China’s National Bureau of Statistics,
China’s economy grew 8.1% in 2021, aided by growth in industrial production.
The gross domestic product (GDP) growth in the fourth quarter was 4%, faster
than the 3.6% forecast by a Reuter’s poll. Industrial production rose by 4.3%
in December 2021 compared to 2020. Fixed asset investment for 2021 grew by
4.9% surpassing expectations of 4.8% growth. Investment in manufacturing grew
by 13.5% in 2021 from a year ago, with that in special purpose machinery rising
the most – up by 24.3% on a year-on-year basis. In 2021, overall retail sales
grew by 12.5% from the prior year’s contraction, and also bettered the levels
in 2019. China’s gross domestic product grew by 2.2% in 2020 from the
previous year, according to media reports. No ‘de-factorization’ The discourse that emerged in 2021 was
that a cocktail of COVID-19, geopolitical tensions and high tariffs would
move factories away from the so-called ‘world’s factory’. There was
expectation that the $4 trillion worth of manufacturing which is happening in
China (which is more than the GDP of India), would get dispersed to new
locations. The epicenter would shift to new settings and the scramble for a
share in the manufacturing pie could result in the rise of the rest. Even a
small share could yield benefits for other emerging economies as China
accounts for about 30% of global manufacturing (equal to that of the United
States, Japan and Germany put together). This could also open up new avenues
for trade for them as China was the world’s biggest exporter in 2020-21,
accounting for 13% of world exports and 18% of world market capitalization.
While the rest of the world debated and waited for the next mega trend that
was to come, ‘the de-factorization of China’, the Chinese economy seems to
have recovered from a short-lived pandemic blip.
When Chinese President Xi Jinping flagged the idea of ‘dual
circulation’, two elements of the strategy were clear. First, there would be
more reliance on ‘internal circulation’, which is the domestic cycle of
production, distribution and consumption supported by innovation and
upgrading in the economy. This was identified as the route for development.
Second, the ‘external circulation’ intended to hasten the process of surplus
accumulation would lose its primacy over time and only play a supplemental
role. The centerpiece of this strategy was that China would continue its emphasis
on industrialization and cut its dependence on global trade and markets. The
two circuits are expected to complement each other. It’s ‘advanced
manufacturing’ Quite contrary to the conventional
linear models of growth through industrialization was the significance of
manufacturing fading overtime and services rising to predominance; China is
stimulating overall growth by catalyzing the industrial sector, pursuing a
radical shift in its approach. China is using its increasingly skilled labour
force and strategic raw materials to enhance its already highly developed
manufacturing capabilities. This is pushing industrialization toward ‘advanced
manufacturing and higher levels of automation, which have been boosted by its
world-beating adoption of artificial intelligence (AI). The effect of such a
strategy is that Chinese manufacturing is moving toward a new kind of
predominance in growing sectors that are less exposed to lower cost
competition. These are the high-tech production sectors, which demand
sophistication and reliability along with cost efficiency.
As traditional Chinese industries confront rising labour costs due to
demographic changes, a widespread application of AI has emerged as an
alternative to reduce operational costs and enhance efficiency. The result is
a slow but drastic transformation of China’s factories – from sweatshops to
shop floors of the fourth Industrial Revolution through digitizing and
automation. The recent economic recovery has been aided by a massive adoption
of artificial intelligence. China has a significant lead over the rest of the
world in AI patent applications and had overtaken the U.S. in 2014. It has
also surpassed the U.S. in terms of the number of AI research publications
and journal citations, according to a media report.
The manufacturing sector in China is witnessing a wave of automation
and AI infusion across sectors. During the pandemic there has been a surge in
the use of a combination of software, hardware and robotics. Interestingly it
is not just start-ups that are leading this; even established market leaders
are also increasing the uptake of AI. For example, the Hangzhou-based EP
Equipment, a nearly 30-year-old manufacturer of lithium-powered warehouse
forklifts, has launched autonomous models that are able to manoeuvre
themselves in factories and on warehouse floors. The Yutong Group, a leading
bus manufacturer with over 50 years of experience, has come out with a
driverless Mini Robobus on the streets of three cities, says a media report.
The increased role of robots and AI in manufacturing is slowly spreading to
design, delivery and even marketing. The net effect of it is that total costs
would eventually be reduced to a small increment over the cost of materials.
In the post-pandemic era, China is positioning itself in the forefront
in manifesting an unprecedented change in industrialization. It might take
years for the rest of the emerging economies to shift gears to move to such a
phase of industrial production. As an early mover, ‘China is laying the
groundwork for setting itself up to be a leader’. There seems to be a realization
that not only how much an economy manufactures but also how adroitly it does
it matters in the new era. It looks like the dividends are already evident in
the GDP numbers. |
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