- 14 hours ago
Former RBI Governor Raghuram Rajan warned that if the US-Israeli war against Iran continues beyond a month, oil prices could surge to $150-$200 per barrel, potentially triggering a global recession.
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00:00As the U.S.-Israeli war against Iran now firmly in its third week,
00:05the world is increasingly concerned about the costs on global economy.
00:11And in India, too, the costs of war are being now looked at closely.
00:17Who better to try and give us a sense of what lies ahead
00:20or what this war means for global and Indian economy
00:25than Raghuram Rajan, former RBI governor, former chief economic advisor
00:31to the government of India, and also the Catherine Dusak Miller,
00:34distinguished professor of finance at Chicago Booth.
00:37Appreciate you joining us. Dr. Rajan, thanks very much.
00:41I want to understand from you, what's your sense of this war's impact on global economy?
00:49I've been speaking to people who are now tentatively using the R word,
00:52suggesting that we could be entering a recession if this war is prolonged.
00:57What's your own sense?
01:00I think the important question is how long it lasts.
01:05Even, of course, if it ends in weeks rather than months,
01:12the damage will be significant,
01:14both in terms of the fact that we've got disrupted energy
01:20for about 20% of the total production of energy sources across the world.
01:28It will take time to revive that.
01:30It will take time to transport that.
01:33So there is damage already.
01:35But because a number of large countries have buffer stocks,
01:41have managed to use some of the sort of oil that is floating on the seas
01:48and attract them towards their countries,
01:51some of that has been alleviated.
01:53But of course, the longer this goes on,
01:56the more impact it will have.
01:59And the worry people have is if you're trying to adjust to the fact
02:03that 15% to 20% of world energy sources are shut in,
02:08you have to have tremendous demand destruction to make that possible,
02:14which means oil prices will be in the $150, $200 a barrel range,
02:21which we haven't encountered before, certainly the $200.
02:24And so there's a lot of anxiety, a lot of uncertainty.
02:30But remember, this is coming on top of the fact that,
02:33you know, in countries like the United States,
02:37inflation is still not dead.
02:38And so with high energy prices,
02:43with sort of the stagnation,
02:46stagnation, stagflationary effects of,
02:50of, you know, oil shut in,
02:53there's also the fact that the interest rates
02:57have to stay higher to combat inflation.
02:59And, and economies aren't positioned for that.
03:02Many were sort of prepared for a gentle
03:06sort of slowing of interest rates.
03:09Many have large fiscal deficits and huge amounts of debt
03:12and financing that will become a problem.
03:14So you will start seeing risk from the financial sector
03:18if this lasts much longer.
03:20So you're saying the length of the war, of course, is key.
03:23You mentioned $150, $200, the price of oil.
03:27That's going to send shockwaves in itself.
03:29And Raghuram Rajan is pointing out the possibility
03:32that if this goes on for, for a month and longer,
03:35oil prices could go as high as $150.
03:38That's a real threat.
03:39Because the moment that happens,
03:41then every economy is going to have to find ways
03:44to, to safeguard itself against the oil shock.
03:50India, for example,
03:52its exposure to the Strait of Hormuz,
03:5350% of our crude oil imports,
03:5585% of LPG supplies,
03:5755% of LNG shipments.
03:59So several countries, India, Japan, China,
04:02all very dependent on the Strait of Hormuz.
04:04What you're saying is the worst case scenario
04:07is oil climbing to $150 and above.
04:11Absolutely.
04:12And remember, these are all sort of tentative estimates.
04:15Nobody really knows how much it would have to go up
04:19to slow down demand
04:21to the extent that demand equals supply.
04:25You're absolutely right
04:27that the biggest exposure
04:29comes from the big Asian economies,
04:32Korea, China, Japan, India.
04:36But also, you know,
04:38what happens in Asia doesn't stay in Asia.
04:40These prices for natural gas,
04:43I mean, there's already competition
04:44between Asia and Europe
04:47for natural gas resources
04:49that are still available.
04:50So prices will show up everywhere,
04:53including the United States.
04:55which is somewhat protected
04:57because it produces
04:59much of its energy needs itself.
05:02But still, the prices will show up there.
05:05And remember,
05:06one of the biggest concerns
05:08for U.S. consumers
05:11is the price of gas
05:12because they drive a price of petroleum,
05:15I should say,
05:16because they drive long distances.
05:18And with the midterm election coming,
05:21with affordability being a big issue,
05:23it definitely has to weigh
05:26on the administration's mind.
05:29You know, and that's sort of the one reason
05:33people think this war
05:34will perhaps be over sooner rather than later,
05:38because the pressure,
05:40the political pressure
05:41on the administration
05:42to bring the price of oil down
05:44will be huge.
05:46And that's primarily
05:50from the fact that U.S. consumers
05:51are going to be hit.
05:53Let's for a moment look at inflation,
05:55Dr. Rajan,
05:56because we've seen
05:56one of the successes
05:58of the Narendra Modi government
05:59over the last 11, 12 years
06:01is they've been very conscious
06:02of ensuring that inflation
06:04is kept under check.
06:07They've largely been successful
06:09in that exercise.
06:10Now they are faced
06:11with an external pressure point.
06:13Yes, some shipments have come in,
06:15but if this war gets prolonged,
06:17there will be growing pressure
06:18as oil prices rise.
06:20Do you believe that India
06:21is vulnerable, therefore,
06:24that despite all the efforts
06:26of the government,
06:27inflationary pressures now
06:29will become the big challenge
06:30in the near future?
06:33Every government is vulnerable
06:35because oil prices affect
06:37so much of the economy.
06:40What is important, however,
06:42is that we today have a framework
06:45by which the central bank
06:47sort of tries to keep inflation
06:49under control over the medium term.
06:52And I think that has added credibility
06:54to the RBI's efforts on inflation,
06:57which is one reason
06:58why inflation has been contained
06:59for so long.
07:01What is important, however,
07:03is that we adhere to that framework,
07:07that the RBI sort of at this point
07:10will see inflation going out of its,
07:14potentially going out of its comfort zone.
07:17But so long as there is widespread sense
07:21that the RBI will bring it back
07:23under control over the medium term,
07:25which is typically, you know,
07:28true of many developed country
07:30central banks,
07:31I think it can be managed.
07:34But absolutely,
07:35the more this war lasts,
07:37the higher energy prices
07:39sort of filter through
07:41everything in the economy,
07:42the harder it will be
07:44to keep inflation
07:45sort of within the bounds
07:47and to bring it back
07:49if it does exceed the bounds.
07:51Because we're already seeing
07:52some effects of that,
07:53Dr. Rajan.
07:54Prices for urea,
07:55a widely used nitrogen-based fertilizer,
07:58already reportedly over 40% higher
08:01across South Asia
08:03than they were at pre-war levels.
08:04This could impact, therefore,
08:06the food supply chain.
08:07Now, again, we come to it.
08:10Are some economies better placed
08:12than others?
08:13Or is this now going to affect
08:15every economy across the world?
08:18Economies that have, you know,
08:21more fiscal room
08:23to help its consumers
08:27and its producers adjust
08:28obviously are in a better position.
08:31And economies that had deflation,
08:33China as an example,
08:35have more room
08:36to allow inflation
08:37to pick up.
08:39But I think what is important
08:41is to make the judgment.
08:43If you think this thing
08:44is transitory,
08:45it's short-term,
08:47you don't want your producers
08:49and consumers
08:50to have too much pain.
08:52Intervening to help them is okay.
08:54But if this is going to last longer,
08:57intervention is a bad idea
08:59because you need the consumers
09:01and producers to adjust.
09:02Otherwise, your fiscal deficit
09:03will rise to alarming proportions.
09:07In India, for example,
09:08we haven't let the price of petrol,
09:11the price of energy
09:13to consumers move very much.
09:17Essentially, a lot of it
09:18is absorbed by the companies.
09:21They get more in,
09:22when the price is low,
09:23they get higher margins.
09:24So they benefit in good times
09:26and they pay back a little bit
09:28in bad times like the current one.
09:30The problem is,
09:31if the bad times last for a long time,
09:33they simply cannot absorb
09:34the large deficit.
09:36The government will start
09:37having to absorb it.
09:38And we got away
09:40from subsidizing oil
09:41way back at high cost.
09:43It's a bad time
09:44to start subsidizing again
09:47if this lasts long enough.
09:49The consumer will have to adjust.
09:50The farmer will have to adjust.
09:52Producers will have to adjust.
09:53That's a judgment call
09:54the government has to make.
09:55When does it decide
09:57that this thing is really
09:58more permanent,
10:00more structural,
10:00and it has to allow adjustment
10:03rather than subsidizing the cost?
10:05Because just a couple of days ago,
10:07on the 9th of March,
10:08IMF's managing director,
10:11Kristina Georgiova,
10:12warned of inflation risks,
10:14saying a 10% increase
10:15in oil prices
10:16is persistent
10:17through most of the year
10:17will result in a 40 basis point
10:20increase in global inflation.
10:22So there is a growing concern
10:25that these are the kind of projections
10:26being made now at the moment.
10:29Yeah, for sure.
10:30There's the inflationary concerns
10:31for India
10:32because we import so much of it.
10:34There's also the external deficit concern.
10:38Again, these are rule of thumb numbers,
10:41but a $10 increase in the price of oil
10:45increases India's current account deficit
10:48by around $17 billion,
10:51which is approximately 0.5% of GDP.
10:56And that's not a small number.
10:58If you think that the oil price
11:00can go $30, $40, $50 up,
11:05it can be a fairly big concern,
11:10which is why at some point
11:13we need to think about adjusting the economy
11:15rather than trying to buffer these costs
11:19and ensuring there is no adjustment.
11:23Because rupee now nearing 93 a dollar,
11:26inflation at a 10-month high,
11:29higher oil prices,
11:31global uncertainty,
11:32stronger dollar.
11:33Where do we go from here?
11:35What happens next?
11:37Well, this is the war
11:39that very, very few people wanted.
11:43And the consequences
11:45were widely warned about,
11:48but we're seeing them happen.
11:50So, yes,
11:52you know,
11:53this is what we call geopolitical risk.
11:56It has to be dealt with.
12:00It means that our past projections,
12:03if this continues,
12:04again, I keep saying
12:05if this continues for much longer.
12:08What does that mean if it continues?
12:09What is short-term for you?
12:11What is it?
12:12It's already three weeks.
12:13When would you say
12:14that it really gets to becoming
12:16something akin to a real global oil shock?
12:20Well, I would say
12:21that it's already a shock.
12:24Whether it is something
12:25that will have to be adjusted.
12:27Remember,
12:28many countries are now
12:29eating into their reserves.
12:31Moreover,
12:33into their petroleum,
12:35natural gas reserves.
12:36But also,
12:38when the shipments resume again,
12:40and it will take time
12:41for the shipments to resume,
12:43countries will also want,
12:45in addition to,
12:46you know,
12:47meeting their production needs
12:49and consumption needs,
12:51they will also want
12:51to build up reserves,
12:53perhaps to a higher level
12:54than before.
12:55So, what this means is
12:57already the demand for energy
13:00will be higher
13:01than it was before.
13:02And so, yes,
13:04there is already a shock.
13:05But I would think
13:07that if this went on
13:08for another month or so,
13:10I think the world economy
13:12is in serious trouble
13:13at that point.
13:14Certainly,
13:15many countries
13:16will have to find
13:17new ways of adjusting.
13:20The government of India,
13:21Dr. Rajan,
13:21has created a
13:22one-lack-crawr
13:23economic stabilization fund
13:25to provide
13:25fiscal headroom
13:27for the country
13:27to respond
13:29to these global headwinds,
13:30to respond to
13:31emergencies
13:32and supply chain disruptions.
13:35Do we need to look
13:36beyond that?
13:36Is that enough
13:37to have this
13:38one-lack-crawr
13:39economic stabilization fund?
13:42Again,
13:43if we need
13:43more than one-lack-crawr,
13:45I think we need
13:46to adjust
13:47rather than subsidize.
13:50That's really
13:50the situation
13:53as it is.
13:55A lakh-crawr
13:56is to help
13:57sensitive sectors.
13:59You mentioned
13:59the farmers
14:01before sowing
14:02for the next crop.
14:04So there may be
14:05targeted support there,
14:07but almost surely
14:08if it lasts
14:09much longer,
14:10the government
14:11doesn't have
14:12the fiscal room
14:12to subsidize oil
14:14on a
14:15semi-permanent basis.
14:17And so it will
14:18have to pass
14:19through the oil prices
14:20to the consumer,
14:21to the producer.
14:23And so I would say
14:24one-lack-crawr
14:25is pretty much
14:27the outer limit
14:28given our fiscal
14:30situation.
14:31And it has to be
14:33very well targeted.
14:34And that's important
14:35to the really needy
14:37small and medium
14:38enterprises,
14:39the farmers,
14:40people,
14:41entities like that
14:42rather than
14:43on a
14:44widespread
14:45scale
14:46to people
14:47who can afford it.
14:48Of course,
14:48the government
14:49is also saying
14:50we are going to
14:50diversify our risk
14:52or diversify our
14:53oil basket,
14:53look for new
14:56places from
14:57where we can
14:57import oil.
14:58But all of that,
14:59I presume,
15:00we are entering
15:01a very uncertain
15:02period.
15:03And uncertainty
15:03is the last thing
15:04in particular
15:05that anyone wants,
15:06particularly the markets.
15:07The markets have
15:07lost what?
15:09$639 billion
15:10in value,
15:11the Indian stock
15:12market since
15:13the conflict
15:14began.
15:15So clearly,
15:15there is this
15:16uncertainty.
15:17And that,
15:19I guess,
15:19is the biggest
15:20worry at the moment.
15:21We don't know,
15:22as you rightly say,
15:23how long the war
15:24will last.
15:25We don't know.
15:26But almost surely,
15:27once it's over,
15:29we need to plan
15:30with a new world
15:31in mind,
15:31right,
15:31where these shocks
15:32can happen,
15:34which means
15:35more buffers.
15:36Our strategic
15:37petroleum reserve
15:38has to be
15:39increased substantially.
15:40We need to think
15:41about whether we
15:41need to store
15:42natural gas,
15:44LPG.
15:45And, you know,
15:46clearly,
15:47those kinds of buffers
15:48are buffers
15:49that the government
15:49will have to
15:50pay for
15:51because the private
15:52sector is not
15:53going to do it
15:53on its own.
15:54We need to
15:55diversify sources,
15:56which is what
15:57you talked about.
15:58But we also need
15:59contingent plans.
16:00If this starts
16:01slowing down,
16:02what else can we do?
16:03What we're doing
16:03on LPG,
16:04for example,
16:05moving more
16:06production within
16:07the country
16:08towards that,
16:09that's something
16:10we need to think
16:11about very seriously
16:12for every element
16:14in our input
16:16supply.
16:17And it's not just
16:18oil and natural gas.
16:19I mean,
16:20these kinds
16:20of disruptions
16:21are going to be
16:22more common,
16:23partly because
16:24of the geopolitical
16:25situation,
16:26but partly also
16:26because of climate
16:27and so on.
16:28So we need
16:30a strategic
16:30resilience plan
16:32across the country,
16:33across many,
16:34many inputs.
16:36And what is important
16:37there is to be
16:37very, very careful
16:39that we don't try
16:40and produce everything.
16:41We simply cannot do
16:43that.
16:43But we are much
16:44more strategic.
16:45But what is key,
16:46what is a real
16:48source of vulnerability
16:49and can we develop
16:51sensible plans
16:52to mitigate that
16:54rather than try
16:55and produce
16:55everything at home?
16:56Can you give me
16:57an example?
16:57You know,
16:58you mentioned
16:58strategic resilience.
17:00Give me a concrete
17:01example where you
17:01think the strategic
17:02resilience can be
17:04turned from a concept
17:06into reality.
17:07Yeah.
17:08So, for example,
17:10many sort of inputs
17:12to our pharmaceuticals,
17:14APIs,
17:15active pharmaceutical
17:16ingredients come
17:17from one source
17:18and we are vulnerable
17:20there in case
17:21there is some
17:22dispute to that
17:23being cut off.
17:24So the question is,
17:25can we diversify
17:27those APIs
17:28across more
17:28countries?
17:30Second,
17:31can we develop
17:32some production
17:33possibilities?
17:34Not that we
17:35produce everything
17:36today,
17:37but we can ramp
17:38up production
17:39relatively quickly
17:40if needed
17:40because we have
17:41the technology,
17:41we have
17:42sort of
17:44factories
17:45that can be
17:47positioned to do
17:48that.
17:48So for that,
17:49we need some
17:50spare capacity.
17:50We also need
17:51perhaps buffer
17:52stocks for
17:53some of the
17:54key APIs,
17:56you know,
17:56maybe a few
17:57months.
17:58We need to
17:59think about
17:59all that.
18:00How do we
18:01do it?
18:01Let me give you
18:02one more
18:03and I'll stop
18:03there,
18:04which is
18:04chips.
18:06We absolutely
18:07cannot make
18:09high-quality
18:10chips in the
18:11short run.
18:12Even medium
18:13quality chips
18:13that go into
18:14cars and so
18:15on,
18:15it's going to
18:16take us
18:16time to be
18:17completely
18:17resilient
18:18ourselves and
18:19independent of
18:20global supply
18:21chains.
18:22So there,
18:23thinking of
18:23building strategic
18:24buffer stocks
18:25is one.
18:26But also,
18:27you know,
18:27how is Russia
18:28managing its
18:29war where it
18:30uses chips in
18:31all its military
18:32equipment without
18:33producing any?
18:34It has a
18:35smuggling network
18:36through many
18:37countries where
18:38it smuggles in
18:40chips because
18:40you can carry
18:41a ton of
18:42chips in a
18:42suitcase.
18:44So the
18:44question is,
18:45can we build
18:46up alternatives
18:48to official
18:49supply chains
18:50also for
18:51small items
18:52where we
18:52absolutely are
18:54dependent on
18:55the rest of
18:55the world?
18:56It seems like
18:56an out-of-the-box
18:58thought, but we
18:59need more out-of-the-box
19:00thoughts as we
19:01try and build
19:02resilience to
19:03what might come.
19:04And the answer is
19:05not always producing
19:06it domestically,
19:07especially if it's
19:08very costly.
19:09So in conclusion,
19:10as we look at
19:11the impact of
19:12the war and
19:13go back to
19:13that, your
19:14sense is,
19:15correct me if
19:16I'm wrong,
19:17the near and
19:19medium-term
19:20concern is if
19:21the war is
19:22protracted and
19:22oil prices
19:23cross $150 a
19:24barrel, that
19:25really is going
19:26to have a
19:26major impact
19:27on inflation,
19:29on the economy,
19:30on the balance
19:30of payments.
19:31You will need
19:32to have some
19:33kind of a
19:34stabilization fund.
19:35you will need
19:36to go beyond
19:37the stabilization
19:38fund, build
19:39new ways of
19:40a strategic
19:40resilience, as
19:41you're calling
19:41it.
19:42In that sense,
19:43would you say
19:43this war is a
19:44wake-up call,
19:45because we're
19:46seeing more and
19:46more global
19:47conflicts play
19:48out, and those
19:49conflicts are,
19:50in a way,
19:50adding to
19:51uncertainty and
19:52the state of
19:52our economy?
19:53Right.
19:54I would just
19:55add an
19:55intermediate
19:56step.
19:56I would say
19:57buffer to the
19:58extent it's
19:59short, allow
20:00adjustment into
20:01prices to the
20:03extent it's
20:04longer, because
20:04you simply
20:05cannot subsidize
20:06your way out
20:06of this.
20:07We don't have
20:08the fiscal
20:08resources.
20:09You have to
20:09let prices
20:10adjust.
20:11And the
20:11third element
20:12is, you
20:13know, start
20:13thinking medium
20:14term.
20:14What kinds
20:15of strategic
20:16responses can
20:16we have across
20:17the economy to
20:18build resilience?
20:19But you're
20:20absolutely right.
20:21This is a
20:22wake-up call.
20:22It is forcing
20:23us to look
20:24inwards in
20:25this new
20:26world, a
20:27world without
20:28order, I
20:28would say, a
20:30world with
20:30enormous risks.
20:31And that's an
20:33important concern we
20:34have to maintain.
20:35Dr. Raghuram
20:36Rajan, for
20:36joining me and
20:37giving us your
20:38perspective and
20:39your analysis,
20:40always good to
20:41have you on the
20:41show.
20:42Thank you so
20:42much.
20:43Thanks, Rajeev.
20:44Thanks for
20:44having me.
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