Relief has come to the Indian economy from an unexpected quarter. Thanks to a cooling down of Asia’s fast-growing economies and persistent low growth in developed economies, world commodity prices have softened. The medium-term trend witnessed in the past decade of a firming up of commodity prices may not have been reversed yet, but there is a thaw. The last quarter witnessed a decline in the prices of several key industrial commodities like oil, nickel, tin, steel, rubber and cotton. This comes against the background of a 30 per cent rise in commodity prices earlier in the year. Rising commodity prices were squeezing profit margins in the industrial sector, even as some manufacturers managed to pass this on to the consumer, and also exerted pressure on food prices. The G20 expressed serious concern over soaring commodity prices and the Food and Agriculture Organisation went a step further to advocate curbs on speculation in commodities. Forces on the demand and the supply side had contributed to this bullish trend. On the demand side, on top of rising demand from developing countries, the monetary easing by the US – through its quantitative easing policy – stimulated a demand for commodities as well as speculative investment in them. The financialisation of commodity markets was a logical consequence. On the supply side, national export control regimes and stock-building policies reduced global availability of several commodities. China, the world’s leading player in the commodities sector, has, in particular, been using stock accumulation and export restrictions as a matter of state policy. While its excessive stock building in the past had disturbed the global supply-demand equilibrium of several commodities, the slowdown on this front in recent months has helped ease prices.
However, the China factor is far from over. It has retained curbs on the export of some key secondary commodities, such as bauxite, zinc, manganese, magnesium, silicon and the like, of which it is the premier supplier. Though the World Trade Organisation has held these curbs contrary to international trade laws, China seems unlikely to heed the world body, given the high domestic inflation and economic slowdown that the country is experiencing. The Chinese response to the global commodity boom and associated high internal inflation has, indeed, been no different from that of most other countries, including India. The strategies have tended to rely on financial instruments, such as a tightening of money supply and an increase in interest rates. These policies seem to have paid off, if looked purely from the inflation control standpoint, though there can be repercussions for overall economic growth. Gold and other precious metals, on the other hand, have seen a fall in price levels because of a strengthening of the dollar. The impact of a sobering down of commodity markets is also visible in India, where manufacturing companies are looking at the prospect of better margins thanks to reduced raw material costs. While non-agricultural commodity prices are softening, it is too early to hope for a similar softening of the prices of food and non-food farm goods.