Cheaper crude, coal, iron & steel and gold portend better days for Indian economy.

A market rigidly fixated on Narendra Modi and what his government does or doesn't do may be missing the wood for the trees, that is, not focusing on big shifts in macro variables.

Many commentators see elections, budgets and central bank statements as key events and ascribe too much importance to them.

However, few seem to be paying attention to the factors that can lead to major shifts — inflation slowing, subsidies declining and deficits contracting — all of which will have a positive effect on economic revival efforts amid monsoon uncertainty.

Such trends include falling global commodity prices, especially those of crude, coal, iron & steel and gold, which together account for close to 50% of India's total imports. In 2013-14, crude was 75% of the total trade deficit and mining was 12%.

While the Modi government is trying to reduce India's dependence on these imported commodities by incentivising higher ethanol blending with petrol and solar power projects, it can take a few years for this to materialise.

India's overall subsidy bill is set to rise to Rs 2.51 lakh crore this year from Rs 2.45 lakh crore last year, while the petroleum subsidy bill is set to drop to Rs 63,426 crore from Rs 85,480 crore thanks to incremental rollbacks.

Any decline in global oil prices will make this contraction even sharper, besides having a beneficial effect on inflation.

"This is a huge positive for India. Every 1% correction in crude can shave off inflation and the government's subsidy burden significantly. If rupee appreciates and other commodities prices remain soft, then the fiscal deficit and current account deficit will improve further," said Nilesh Shah, MD and CEO of Axis Capital.

"Lower deficit and lower inflation will give India a huge advantage over other emerging markets such as Russia, Brazil, China and Indonesia in attracting global funds."

India's June retail inflation slowed to 7.31%, the lowest since the current index began in January 2012, while wholesale inflation decelerated to the lowest in four months to 5.43%.

The Reserve Bank of India has meanwhile set a retail inflation target of 8% by January 2015 and 6% by January 2016. Meeting these targets would mean the central bank being more easily persuaded to cut rates, which will likely act as yet another booster for the economy.

Crude prices are down 7% in the past one month and 2% in the year to date. "According to our computation, for every $1 per barrel decline in Indian basket crude price, India's import bill on account of only crude oil will decline by around $1.4 billion," said K Ravichandran, senior vice-president and co-head, corporate ratings, ICRA.

International coal prices are down by 17% in the year to date and iron ore prices are down by 27%. At the same time, gold prices have come off by 30% from their highs and have become range-bound for the past one year. As a result, the trade deficit in the first quarter of 2014-15 is expected to be lower by 5-6% year-on-year.

Experts believe global crude, coal and iron & steel prices will continue to remain soft for the remaining part of the current fiscal. Coal and iron ore prices have been trending down over the past two years given the weak demand from China, the largest consumer of coal and steel, and any recovery soon appears unlikely.

While China is the largest consumer of coal, the US is the largest consumer of oil. But increasing production of natural gas and oil, thanks mainly to fracking, has meant that the US is almost 80% self-sufficient in its energy consumption from about 69% seven years ago.

Some experts are even projecting US energy self-sufficiency within a decade. This dynamic is evident in recent oil price behaviour.

While commodity prices have come off from their highs, the correction is even sharper in rupee terms. The Indian currency has appreciated by 4.3% against the dollar in the year to date.

Source : economictimes.indiatimes.com