Economic scene to remain uncertain in the face of dual attack of COVID-19 and crude oil-price war

Pratim Ranjan Bose

Nymex crude is selling at $23 a barrel – very close to the dip in July 1973 ($20 a bbl) and near the historic low of $17 a bbl in 1946 and 1998. Yet global markets are crashing, courtesy corona or COVID-19 outbreak. BSE sensex is down by nearly one-third in a month.

The crucial question is: Will the markets stabilize soon? The optimists may take a cue from the slowing down of new infections in China and, peg it on possible success of India in preventing community transmission of the virus, to predict better times. 

Era of uncertainty

However, such predictions are unlikely to come true, as there are definite uncertainties building up on multiple fronts – with or without COVID – which will keep global and Indian economy occupied for at least next one year, if not more.

 First and foremost, the ongoing stress on social distancing to restrict community spread of the disease may slowdown the impact of COVID for the time being, but the solution will come only with the vaccine – which is nearly two years away.

Considering that the world and Indian economy will try to get back into action mode as soon as the current spate of pandemic subsides; the virus may start spreading again and may pick another soft target, sending shockwaves to the world.

The fear factor is equal or more than the days after 9/11. And the threat of unseen enemy will force the world to take unprecedented precautions, which might trigger a set of readjustments and cost push, in trade and commerce.

Italy was almost entirely dependent on China and Wuhan in particular for its fashion industry. Will they remain as dependent on a single source? Bangladesh was importing raw materials from China and exporting to Western Europe and America. Will the model continue?

Fiscal challenges for India

  In the short run, however, there are more pressing issues to handle. Despite low fuel cost, global aviation sector is staring at collapse due to restrictions in movement. Moreover, it is not known if the post-Corona world would put fresh restrictions on movement of tourists and immigrants.

Corona will force India to step up investment in the health sector. Meanwhile decline in business will affect revenue targets both at the corporate as well as government levels. Decline in stock indices and overall gloom will impact the disinvestment targets.

It means the Centre has to prepare a war chest, as developed countries are doing. For a revenue deficit economy, it means fiscal slippage. Budget projections for 2020-21 may go haywire.

Government is (and should) try to cover that by imposing taxes on oil. But high oil price will also rob the economy some growth opportunity.

A bigger trouble may break out in the corporate and banking front. Insolvency and bankruptcy code (IBC) helped banks recover cash and trigger a change in the corporate financing model, over the last years.

Can banks pursue with the recovery activities as aggressively? Will asset sale offers find as many interested parties and as high a price? Will foreign investors keep acquiring Indian assets at the same pace? If they don’t, either corporates or banks or both, have to take hit on their balance sheets.

Add to this the recent trend of populist politics to distribute electricity at lower than cost price and you know banks are in real trouble, unless India turns it into an opportunity to unleash a set of reforms to break the stranglehold of socialist policies forever.

Geopolitical uncertainty

Meanwhile, fresh uncertainty may be brewing in the middle east. By bringing down the oil price, Saudi Arabia might have unleashed a serious economic offensive on Shia majority Iran. The equation, if true, is in the interest of the US.

Meanwhile, neither US nor Russia are on the same page with Erdogan’s Sunni-majority Turkey.  A weaker Turkey might work in the interest of both the major powers. It will help Saudi to remove any competition from the Islamic world. 

 The brighter side of this conjecture is, oil prices may remain low in the immediate run. On the flip side, low oil price will impact a host of oil economies in mid-East and Africa inviting may have wider ramifications.

There are many implications of this emerging scenario but, what is of immediate concern to India and other South Asian economies is mass retrenchment of labours. Any such fall out will impact Indian economy.

The impact will be heavier on remittance dependent economies like Bangladesh, Nepal etc. 

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This article is published in ETVBharat 

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