While Indian economy apparently reaped huge benefits from a sharp fall in crude oil prices about three years ago, with the GDP growth topping 8% and defying a global slowdown, the oil price fall actually ended up hurting Indian economy’s competitiveness to a phenomenon called ‘Dutch Disease’, JP Morgan’s chief India economist Sajjid Z Chinoy said.
“In 1961, Holland gets a huge windfall of gas deposits, capital comes flooding in, they spend that windfall, the exchange rate appreciates, and the rest of the Dutch economy becomes uncompetitive,” Sajjid Chinoy said at a recent talk with The Indian Express. “A little bit of the Dutch disease (a phrase in the economy) has happened to India. Our windfall is from lower oil — we spent it, the exchange rate went up, and that made the underline current account less competitive,” he added.
India meets more than 80% of its oil requirements through imports and usually benefits from lower crude oil prices. The Brent crude oil prices fell to a low of $29.25 in January 2016 from $125 per barrel in March 2012, because of which, the Indian economy got windfall gains of about 3% of GDP at the time.
That very large windfall got spent, Sajid Chinoy said, adding that therefore a little bit depreciation in the currency is healthy as well as necessary. The rupee has depreciated about 15% against the US dollar since January this year and is one of the worst performing currency in Asia.
Sajjid Chinoy said that it is misleading to say that Indian rupee is Asia’s worst performing currency. People generally look at the dollar-rupee rate, but it’s the trade-weighted exchange rate — the real exchange rate — that matters for the economy. “If you look at all your trading partners, and look at those bilateral trade exchange rates, and take a weighted average of that, that’s what matters for the economy as a whole,” he said. By looking at the comparative set with our trading partners, the trade-weighted exchange rate actually appreciated 20% between 2014 and early 2018, which has now weakened by 9%, he added.
The Indian economy has been facing a rough weather on account of rising crude prices and depreciation in rupee against US dollar, adding pressure on the current account deficit (CAD), fiscal deficit and inflation. Last year, India’s CAD was 1.9% of the GDP and this year it is hovering at around 3% of the GDP. “3% is hard to finance at the best of times, especially when global financial conditions are tightening and US rates are going up,” Sajjid Chinoy said.
Source: financialexpress.com