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If you think the ongoing historic decline in crude oil prices would reduce inflation, the oil bill, petroleum subsidy, the fiscal deficit and interest rates, thereby boosting India's gross domestic product (GDP) growth, you could be wrong.
An analysis of year-wise movements of average global crude oil prices versus India's GDP reveals no inverse correlation, contrary to wide belief. On the contrary, the country's GDP growth has risen every time crude prices have gone up and vice versa.
Correlation
Average global crude oil prices moved between $10 and $20 a barrel between 1947 and 1972. There was a jump from $15 to $42 a barrel in 1973-74, after the petro exporters' cartel, Opec, imposed an embargo on the US, UK, Japan, Netherlands and Canada for supporting Israel. That year, India's GDP growth also jumped to 4.6 per cent from a 0.3 per cent decline the previous year.
Similarly, crude declined 40 per cent to less than $12 a barrel in 1998-99, when Opec announced a10 per cent quota increase amid slowing Asian economies. India's GDP growth also slumped to an average of 5.5 per cent in 1999 from eight per cent the previous year. Again, crude prices declined 18 per cent in 2002-03 and India's GDP growth also remained a modest four per cent. A year later, in 2004, GDP growth jumped eight per cent when crude prices started rising. In 2004-08, crude oil jumped from $27 a barrel to over $98, due to multiple factors - Iraq war, growth of Asian economies and a weaker dollar. India's annual GDP growth rose from eight per cent to 9.3 per cent in this period. During the financial crisis of 2008-09, crude rates slumped sharply from $98 a barrel to $50 a barrel and India's GDP growth came down to 6.7 per cent in 2009 from 9.3 per cent the year before.
Why this correlation? According to Dhananjay Sinha, head of institutional research at Emkay Global Financial Services, positive correlation exists between not only crude oil prices and GDP growth but corporate earnings, too. "This defies popular perception. There are some possible explanations. Recent crude price declines have been triggered by growth concerns in Europe, Japan and China. So, causality runs from the growth to commodity prices. Second, there has been a sharp decline of more than 100 per cent in the demand and supply ratio of crude oil this time," he said.
He added a stronger dollar was generally accompanied by a weakening in crude, other commodity prices and European member-currencies. "Most important, India's growth cycle has converged with the global cycle, specifically Europe's. Hence, the cost advantage from declining commodity prices is neutralised by slower growth in India," he said.
Other experts are less convinced that there is a strong correlation. "It is difficult to establish a strong causal affect between crude rates and GDP growth, unless there is a dramatic fluctuation in oil prices. GDP is impact only partially by oil prices. There are other more pressing factors at play - monsoon and the health of the European and US economies, for instance," said Amrit Pandurangi, senior director at Deloitte said. Falling crude prices might create a positive impact on balance of payments but not necessarily significantly impact the economy as a whole, he added.
Sinha agrees the benefits of falling crude prices might be exaggerated. A decline in global commodity prices, which has high positive correlation with global crude oil prices, will lower growths for both exports and imports. Hence, a decline in the current account deficit might occur during times of lower commodity prices, predominantly due to lower growth.
