00:00World of oil is being really shaken up. Remember before the war, February 27th, it was $72.48 per
00:08barrel. March 9th, it reached a record high of $120 a barrel. Then after the US pause came down
00:15to $100 a barrel. Ceasefire speculation, $102 a barrel as of yesterday. And today, after the
00:23speech of Donald Trump, it's risen once again to $109.16 per barrel, about a 4% increase.
00:29Now, all of this is affecting also manufacturing in this country. Manufacturing latest PMI figures
00:35is at a four-year low. Purchasing managers index, October 59.2, November 56.6, December 55,
00:46January 55.4, February 56.9. It's come down to 53.9. So clearly the concerns are growing
00:54on the economic front. Good point to turn to my other guest, Dr. Sajid Chinoy, Chief
00:59MD and India Economist JP Morgan joining me. Good to have you on the show, Sajid. We've
01:05had another day of great volatility in oil prices. Crude oil surging after Donald Trump's speech
01:11by more than 4%. What does this suggest about what the war is doing and indeed just how economies
01:17across the world are having to deal with the sheer uncertainty?
01:22Good evening, Rajdeep. I think we're now in the fifth week. And the fact is, unfortunately,
01:26that economic costs are building with every single day. We're now in a situation where crude
01:31prices are 50% higher than they were before the war started. Gas prices have increased further.
01:37And so this is an adverse supply shock. It's already beginning to have stagflationary consequences
01:43around the world, in Asia as well. That means growth is going to be weaker. That means inflation
01:49is going to be higher. But in fact, this shock is even more pernicious than previous energy shocks.
01:54If you think back to 2022, there the transmission channel was largely prices. Here what's happened
02:01is actual availability of energy has become a question mark for many countries in Asia. And that
02:08makes this far more pernicious for the following reason. If we're at a point where, you know, energy,
02:13gas, LPG is not available, then you start risking a sudden stop in industrial activity.
02:20And then you have memories of COVID. Because what these sudden stops do is they generate
02:24nonlinear outcomes in the economy. If a small business were to shut down because of lack of
02:30energy availability, as we learned in COVID, very hard to reverse that. You know, if a gig worker
02:35went back to their village, very hard to call them back. So I think the immediate task for countries
02:39in Asia, this is not just India. Philippines, you know, enforced an emergency last week.
02:45You know, in Vietnam, domestic flights have come down. In many ASEAN economies, work from home has
02:50been mandated. The immediate task here is to just try and augment supplies as much as you can,
02:57no matter what the price, and to ration them efficiently. One last thing I'll say is the fact
03:03that this hit is building is visible in the only data that we have from March. We've got the PMI
03:10indices that came out yesterday and today, and they show a pretty large hit to sentiment and activity
03:16across most countries in Asia. You know, but having said that, Sajid, the government of India,
03:21and you're part of the Economic Advisory Council, is saying that we've got buffer stocks that should
03:26take us through possibly the next month and a half, at least. There is no real crisis that whatever is
03:31being created in terms of LPG shortages is artificially created. The reality on the ground,
03:36I've just come back from Kerala covering the elections, is that people, particularly small
03:41businesses, are really taking a hit. Is there a mismatch between what is being told to us by
03:46governments and the reality on the ground?
03:50Rajdeep, one has to look at different energy sources here. It's true that there's no shortage of
03:56of crude in India. In fact, you know, we've really ramped up our Russian imports. There's no shortage
04:02of petrol pumps for crude prices. I think the issue is that this is not just about crude. There are
04:08other
04:09energy sources, LPG and natural gas in there. To the government's credit, you know, the quantum to the
04:16corporate sector, to the commercial sector has increased in recent weeks. But we're still at, you know,
04:26pre-crisis. And Rajdeep, that's a reality around the world, because the fact is crude is the 15 million
04:32barrels have been taken off the market. And one would argue 20 percent of LNG is off the market. So
04:37one would have to live with some rationing. And there, I think how it's rationed becomes important,
04:43because to your point, you know, if a sector has 15 or 20 percent less, or the industrial sector has
04:49it,
04:49the large firms tend to have bigger buffers and can get through this, the real impact is felt on SMEs.
04:57So we'll have to ensure that the hit to SMEs is as minimal as possible. But there are no good
05:04options in this environment. All we can hope to do is augment domestic production that's begun for LPG,
05:11you know, try and diversify imports from all over the world. And you know, this is not just about LPG
05:16LNG. I'll give you an example. Propylene is something that we tend to import from the Middle
05:22East. Now, those imports have come down. That's affected bags, right? Cement bags. If you can't
05:29have cement bags, then you can produce cement. But then you can't distribute cement. If you can't do
05:34that, you know, then you hurt construction. So the second order, third order effect of supply chains,
05:39when derivatives of petroleum products are not available, are quite complex. So, you know,
05:45the goal has to be how do you augment as much as you can. You know, that's fascinating. But that
05:49is also,
05:50Sajid, precisely part of the problem. Large corporates will get their protection. They'll be insulated.
05:55It's the smaller SMEs and those in the informal sector, the chai shop, the small restaurant,
06:00who are getting hit. In that sense, some, there are similarities to what happened during the COVID-2
06:05lockdown. The recognition that it's the smaller chai shop who's had to close down because of a lack of gas.
06:11The concern is that, as many are, is that, do you believe that policy makers are aware of the scale
06:18of the problem? And unless it reaches a crisis point, we don't wake up to it. As you said,
06:24certain countries are looking at rationing emergency lockdowns. Do you believe a stage could be reached
06:30even in a country like India? Or am I painting a very doom and gloom scenario if this war continues?
06:37No, I think that's not imminent yet, Rajdi, because what we've seen is if you look at what's currently
06:43available, what's being sourced from the high seas, yes, there's a bit of rationing happening on gas,
06:48on LPG, and that will have economic consequences that we discussed. But, you know, I'm convinced that the government,
06:54you know, is treating this like a crisis, is in mission mode, is trying to source supplies from
07:00all over the world. We have seen local LPG production pick up. So, both things can be true,
07:07that there will be economic costs, and you can be in crisis mode because, as I mentioned,
07:12there are no good options at this point. If there's a global shortage of crude of 15% and gas
07:17of 20%,
07:17every country will have to live with shortages. The question then is, A, how do you ration them,
07:22and B, can you look for alternatives? Should we be providing fiscal subsidies for induction stoves to
07:28try and get people to transition to that, at least, you know, restaurants that can? Should we move people
07:34to pipe gas? Those are the alternatives that you'll have to firefight in the short term.
07:38But it's not just a question of handling oil shortages and fuel prices. The worry is, of course,
07:44the cascading impact that this has on inflation, on food prices, on fertilizers. I come back to you,
07:51do you get a sense that all of this could really happen in the near future? Am I only once
07:57again
07:57painting a doom and gloom scenario? If this war stretches into May, are these going to be real
08:03concerns now on the ground? Rajiv, that is the key. I think duration really is the key. When you talk
08:11about nonlinear impacts on activity or on inflation, a lot of this comes down to duration. If this war
08:17were to wind up in the next week or 10 days, I think we can avoid the worst outcomes. If
08:22the
08:22Strait of Hormuz is closed for another month or two months, I fear that the stagflation will hit
08:28around the world. Nobody's going to be spared here in terms of much lower growth and much higher
08:33inflation is here to stay. And, you know, the Ministry of Finance and its monthly economic review did
08:38point out that the costs here both on growth and inflation are non-negligible. So, I think it will
08:44depend on duration. I think that the response has to be three-tiered. The first tier is we won't worry
08:50about inflation just as yet. Let's get availability. Let's stop enterprises from shutting down. Let's stop
08:55people from being laid off. Once that settles, let's say a month from now or two months from now,
09:01availability is not a problem, then we have to worry about inflation. And I'll tell you why. Even if the
09:06Strait of Hormuz is closed, we're going to be living in 2026 where crude prices and gas prices
09:12could remain much higher than we had envisioned coming into the year because there's been sufficient
09:17damage done to energy infrastructure in the region and that supply will take several weeks or months
09:23to come back on stream. And think of what will happen to demand. Many countries around the world
09:28are running down their strategic petroleum reserves and they will want to build those up and build even
09:33higher buffers. So, even when the war ends, you will see strong demand of supply taking time to
09:39come back and we could be living with higher energy prices. That's when the inflationary consequences
09:43will come in. And that's when, you know, we'll have to make choices. I think the government's done the
09:48right thing by taking the initial hit on the government's balance sheet. We saw that taxes were
09:53cut last, excise duty taxes were cut last Friday. But if the shock remains, you know, if energy prices
09:59remain elevated for the next six months, then we'll have to think of more equitable burden sharing.
10:05Some of this, unfortunately, will have to be passed on to consumers for no other reason, but we want to
10:11elicit the behavioral response. If energy prices go up, we want Indian consumers and businesses to respond
10:17appropriately and that will involve. So, these are not, when I talk about stagflation, the unfortunate
10:23story is there are no easy choices here. They're just the best of the bad choices.
10:27You know, a final question, Sajid. At the start of the year, we were talking about this being
10:32India's Goldilocks phase of strong growth, low inflation. Three months later, we are talking of
10:37stagflation. Is the Goldilocks phase now to be put aside for India at least for 26-27 financial year?
10:46So, there's no doubt that there's going to be a hit to growth and, you know, inflation will be under
10:51pressure. The key, of course, is this a two-month shock? Is it a six-month shock? I think with
10:55every
10:55month the strait is closed, the hit to growth will rise in a non-linear manner. But Rajdeep,
11:00what I will say is starting points on a couple of dimensions in India have been, you know, have been
11:06much stronger. You know, remember, India entered COVID with growth slowing to less than 4% and COVID
11:12amplified the shock. Here, the good news is we're coming into a year where we thought growth is
11:16going to be at seven. So, even if the hit is large, there are some buffers to work with.
11:20We came into a year with inflation, you know, at less than 4%. So, even if inflation picks up,
11:27there are some buffers to work with both in growth and inflation. I think what we'll need more watching
11:31are external imbalances. It's the current account, the capital account, the balance of payments,
11:37which are coming under pressure. And I think that's the variable that India will need to use.
11:42And again, what we discussed last time, if you want to ensure the current account is sustainable,
11:47you need both internal and external shock absorbers. The internal shock absorber is over time,
11:53not now. You know, retail prices will have to rise slowly so that volumes come off. And the external
11:59shock absorber is you'll need to absorb some amount of rupee depreciation, because only then will,
12:05you know, exports pick up, imports come down, and the current account remains sustainable. So,
12:09I would say India comes in with strong growth and inflation dynamics, which allows it to absorb
12:14some hit on growth and inflation. The part that I remain focused on is the external sector.
Comments