The Hindu Business Line : Serious choices on oil front

It is quite evident that the high oil prices are exerting a very strong influence on all markets. Also the fact that the price march has been relentless has meant increasing despair for both governments and public at large. One thought that the oil prices would come off seeing concerted actions from several governments increasing retail prices and reducing subsidies.

But this hasn’t taken place and the likely consumer demand decline hasn’t materialised. The fact that only 10 per cent of the oil price increase was passed on to the consumers — and 90 per cent is either for shareholders or future generations to bear — has truly nailed the bull market.

As one analyst puts it “The loss in market cap is now roughly equal to the present value of the increase in fiscal deficit being brought about by the high oil prices. Yes the over $800-billion market-cap decline in aggregate terms is equal to the $80-billion annual additional fiscal burden.” Of course, the skewed mathematics needs to be corrected — better tax structure, more austerity, postponement of the great growth, realistic cost of capital and all things which people should always be doing but don’t like being forced to do.

The Government will have to make serious choices on the oil front. At some stage it will have to take actions to try to solve the implications of high long term oil prices — rather than argue whether the rise is genuine or speculative or warranted or cartelised.

Some solutions include using bargaining power with large producer nations to get a lower long term oil price deal from suppliers in return for volume commitment (just like we get the best terms for purchasing telecom networks), possibility of the nuclear deal and the Iran pipeline deal going hand in hand. India has the opportunity to better exploit its vast coal reserves and needs to enhance investments to create a more efficient rail and waterways/coastal infrastructure, and also tackle diesel/fuel oil substitution.

The country also awaits oil/gas from one of the largest finds — that may alleviate some of the problems — if oil prices do not go up further. As India and Chinese markets correct — questions would be raised on the long-term projections of the growth rates and then eventually there may be some relief. Like they say: “Let go and I will catch you.” Already, other commodities are being threatened by the supremacy of oil. Sometimes it is best to salute the winner — so that the others can go on with the game.

Franklin Templeton Investments

Vulnerability to oil prices

India’s vulnerability to high oil prices is known, since we import nearly 70 per cent of our oil requirement. Compounding the oil- led surge in current account deficit is the lower capital inflows, which put pressure on currency and inflation leading to higher interest rates. Sustained high interest rates will most likely slow down the already decelerating economy.

Thus, the key question in the minds of investors today is, to what extent will the high oil prices, inflation and interest rates slow down the Indian economy? The longer high oil prices sustain, the bigger will be the question mark on economic growth for the next year (medium term). Thus, it is critical from India’s growth point of view that oil prices cool down and stabilise. We believe that a meaningful correction in oil prices is essential for India to maintain the 8 per cent GDP growth over the long term and resumption of bull-run in Indian equities.

Considering India’s vulnerability to high crude oil prices, it is not surprising that Indian equities are amongst the worst performing markets YTD in MSCI. China and India, the growth drivers of global oil demand are the worst performing equity markets this year. On the other hand, Brazil and Russia, which are surplus in crude oil and have equity markets dominated by commodity sectors, are amongst the best performing.

For the time being, it seems that global investors are willing to ignore the long-term growth potential of the Chinese and Indian equities, focusing instead on the short-term disruption caused by high inflation and commodity prices. The Indian equities markets are down over 35 per cent in the last six months, the steepest and longest correction in the last five years. In the short-run, Indian equities may overshoot on the downside as investors panic on rising crude prices and high inflation. For the long-term equity investor’s point of view, there is possibly further downside in the short run.

Morgan Stanley Mutual Fund

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