00:01Now, petrol, diesel, domestic LPG hike next.
00:06How long can India hold out?
00:08How best to tackle this oil shock?
00:12Joining me now is Sajid Chinoy.
00:15Dr. Sajid Chinoy is Chief MD and India Economist at J.P. Morgan
00:19and also the South Asia in charge.
00:22I appreciate you joining us, Sajid.
00:24As predicted, you've been on our show before.
00:27The elections are over.
00:28The government is going in today for commercial price hike in LPG cylinders
00:33and we expect a domestic price hike in fuel prices within the next week.
00:37Is that something that was inevitable in your view?
00:41Absolutely, Rajdeep. Good evening.
00:43This was inevitable and unavoidable.
00:46And I think it's first good to lay out the global backdrop
00:49because I think the global situation is more challenging,
00:53more urgent and more pressing than we actually believe.
00:56You know, this is the third month of the war.
00:58Everybody speaks about the fact that it's the largest energy shock we've ever had.
01:02But the fact is about 13.5 million barrels of crude and crude products
01:08have been taken off the market.
01:09Now, if that happened in the past,
01:11you would have seen crude prices well over $150 a barrel.
01:15But the world and India have not seen the full impact of that
01:19because the first two months the world has been dipping into its inventories,
01:23and one would argue almost 10 million barrels of inventories have been run down, right?
01:28So this is an unsustainable situation where you can't be burning your inventories at this pace.
01:33The implication is with every month that this goes on,
01:38crude prices will have to get much higher so that demand meets supply.
01:42If supply is down by 13.5 million barrels
01:45and you cannot be running your inventories down month after month,
01:48demand will have to come down to match that.
01:50And the equilibrating mechanism here is prices.
01:53So I hate to say, but crude prices, I think, at 110 are deceptively low.
01:58They're not reflecting the true situation.
02:00If this continues for a few more weeks or another month or so,
02:04my sense is crude prices will jump up very sharply.
02:07Now, in that environment, I think countries can only do two things.
02:12One is when there's a global shortage,
02:13you can try and procure as much as you want,
02:16but that procurement comes at a cost.
02:18The second reason why crude prices are not reflective of the reality is,
02:23on your screen, they will show you crude is $110 a barrel.
02:26But on the high seas, when countries are bidding for the next ship of oil,
02:31that bidding price is much higher than 110.
02:34So the actual price that India is importing at is much higher.
02:38Number one, so the question is,
02:39let's import as much as we can from around the world.
02:42But then, Rajseep, as we've discussed several times before,
02:45there has to be equitable burden sharing.
02:47The government took the first hit,
02:49which was an excise duty cut of 10 rupees.
02:53Despite that excise duty cut,
02:54the under-recoveries of oil marketing companies
02:57has now reached an unsustainable level.
03:00And so, unfortunately,
03:01the next hit will have to be borne by households,
03:05firms, and the consumer.
03:06Now, why is this important?
03:07From an economic perspective, again,
03:09you want demand to meet supply.
03:11You want Indian households to actually behave in a manner
03:15that reflects the true opportunity cost of food prices.
03:18So if prices don't go up,
03:20we'll be consuming crude and petroleum products
03:24in a way that's not consistent with the reality.
03:27So to generate the true behavioral response,
03:29unfortunately, prices will have to reflect that reality.
03:33As you pointed out,
03:33India is the only country in the world,
03:36among the large economies that we track,
03:37that has not increased, you know,
03:40petrol and diesel prices.
03:41Almost every other country,
03:42as in the US, it's 40% higher.
03:44So this is an unfortunate but inevitable reality.
03:47In fact, I have that graphic playing on the screen.
03:50Over the last three months,
03:51India's prices 0.1%,
03:53Pakistan 47.9% rise in diesel prices,
03:58Bangladesh 12.7%,
04:00China 26.9%,
04:02US 54.7%,
04:04UK 33.8%,
04:05UAE 83.9%.
04:08So what you're suggesting
04:09is that this was inevitable,
04:11but it could set off an inflationary spiral.
04:14Isn't that going to be a major concern,
04:16particularly since the RBI
04:18has to look at what that does
04:22to their monetary policy?
04:23And somewhere down the line,
04:25there's only so much, presumably,
04:27that even the central bank can do.
04:29It's a good point, Rajdeep.
04:31I think the silver lining here
04:33is that unlike COVID,
04:35India entered this crisis
04:36with strong macros
04:37as far as growth and inflation are concerned.
04:40Remember, we were in a cyclical upswing last year.
04:42GDP growth was 7.5%.
04:43Most forecasters thought this year
04:45growth would be 7%.
04:47And inflation was at record lows last year,
04:502%.
04:50It's picking up,
04:51but below the 4% target.
04:52So the good news is
04:53that the starting points here
04:55are quite favorable.
04:57Growth is high.
04:57Inflation is low,
04:59but you're right.
05:00There's no escaping the reality
05:01that given inflation pressures
05:03around the world,
05:04this is going to be inflationary.
05:07My sense is
05:08the Reserve Bank of India,
05:09like other central banks,
05:10is going to be patient
05:11in terms of monetary policy
05:13because this is a supply shock.
05:16Central banks tend to look through
05:17temporary supply shocks.
05:18It's only if inflation expectations
05:21get unanchored
05:22or this seeps into core inflation
05:25that the RBI will react.
05:26My bigger concern, Rajdeep,
05:28is not inflation.
05:30Growth will take a hit undoubtedly.
05:31It's the external sector.
05:33You know, the fact was
05:34India's current account
05:35was very benign coming into this,
05:37but capital flows
05:38had completely dried up
05:40and the rupee was under pressure.
05:42Now what's going to happen is
05:43with crude prices at 120
05:44and climbing,
05:46and you're seeing, you know,
05:48other prices,
05:48gas prices have gone up.
05:50Remittances from the Middle East
05:52will come down.
05:53Exports could take a hit
05:54in the months to come.
05:55It's a perfect storm
05:57where the current account
05:57could widen
05:58and if capital flows
05:59don't pick up,
06:01there'll be sustained pressure
06:02on the rupee.
06:03Here again,
06:04I think we have to be realistic.
06:06There's a lot of human cry
06:07when the currency depreciates.
06:08We have to again
06:09pursue the philosophy
06:10of burden sharing.
06:12Yes, the RBI
06:13can use some foreign currency reserves
06:14to smooth the depreciation,
06:16but there's no alternative
06:17in this environment
06:18for the rupee
06:19to become the shock absorber.
06:21You know, but as you said,
06:23that this growth
06:24could take a hit.
06:25Therefore,
06:26are we heading for a period,
06:28some countries have already
06:29called for austerity
06:31in the light of what is happening
06:33in the Gulf.
06:35No immediate sign
06:36to the end to the war.
06:37And I remember
06:37in our last interaction,
06:39you had said,
06:40if this war enters May,
06:41that's when
06:43the pressures will grow.
06:44We are now on the 1st of May
06:46and there is no sign
06:47of this war ending.
06:48So, the longer
06:49it presumably takes,
06:50the more all forecasts
06:52are going to have to be revised,
06:53including growth forecasts.
06:55Absolutely.
06:56And you know,
06:57the concern, Rajdeep,
06:58is this is not just
06:59a price hit.
07:00The 2022 war
07:01was one where
07:01prices went up.
07:03Crude, that's the case.
07:04Crude India
07:05can still import as much,
07:06you know, from Russia
07:07and it's a price issue.
07:08The worry is
07:09outside of crude,
07:10when it comes to LPG
07:12and LNG,
07:13there's actually
07:13a physical supply shortage.
07:15And that is going to result
07:17in non-linearities, right?
07:18If small businesses
07:19cannot procure,
07:20you know,
07:21LNG or LPG,
07:23we've seen non-linearities
07:24in COVID
07:25where once a small business
07:26shuts down,
07:27they don't often,
07:28they don't start back up
07:29even if energy supplies
07:30are restored.
07:31Once a gig worker
07:32goes back home,
07:33they typically don't come back.
07:34So, what India has to guard against
07:36are these non-linearities,
07:37but this is a reality
07:38around the world.
07:39And to your point,
07:40when you say non-linear,
07:41it means May will be
07:43worse than April
07:44and June will be
07:45worse than May
07:46around the world.
07:46That's what a non-linear
07:47response means
07:48and there are no good options
07:50in this environment,
07:51unfortunately.
07:52You say there are no good options,
07:54but what are the options?
07:55I mean,
07:55there has been the belief
07:56that we need to
07:57de-risk ourselves
07:58from all our oil
07:59coming through the
08:00Strait of Hormuz,
08:01look for alternative
08:03supply
08:04from other countries.
08:05Russia
08:06has already been seen
08:07as a country
08:08with which we've again,
08:10we are resuming
08:11getting oil supplies.
08:14Do you see
08:15a kind of
08:18urgent need
08:19to reduce our dependence
08:21in a way
08:22from oil
08:22that flows in
08:23from the Strait of Hormuz?
08:24Absolutely, Rajiv.
08:25So, there are two
08:27time horizons here.
08:29One is
08:29through the crisis
08:30and the firefighting
08:31we need to do
08:32and that is to try
08:33and hunt for
08:34energy products
08:35anywhere around the world
08:36where we've had
08:37more success
08:38is, you know,
08:39importing more food
08:40from Russia
08:41to make up for
08:41some of the shortfall
08:42from the Strait of Hormuz.
08:43We're importing
08:44more LNG from the US,
08:46more LPG from Australia.
08:47So, in the near term,
08:48the options are
08:49import as much as you can
08:51no matter what the price,
08:52number one.
08:52Number two,
08:54make sure there's
08:55equitable burden sharing.
08:57Households,
08:57businesses,
08:58and the government
08:59and oil marketing companies
09:00share the burden.
09:01And number three,
09:03you know,
09:03we learned from COVID
09:04that the Reserve Bank
09:05of India
09:05most likely,
09:06I think,
09:07soon,
09:07you know,
09:08may well consider
09:09a ECLGS
09:11which was regulatory
09:12forbearance
09:13for small businesses
09:14because small businesses
09:15will be in the front line
09:16and we want to make sure
09:17that the shock
09:18is not magnified.
09:19So, liquidity support,
09:21regulatory forbearance
09:22for small businesses.
09:23That's the near term.
09:24But just 30 seconds,
09:25Radhi,
09:26we have to step back
09:26and I wrote about this
09:27in the Business Standard
09:29yesterday.
09:29I think there are
09:30really important lessons
09:32to draw from this
09:33that India has to,
09:34like other countries,
09:35recognize the new,
09:37changed reality.
09:38This is a very hostile world
09:39where trade is weaponized,
09:41supply chains are fragile
09:42and de-risk ourselves.
09:44And I think that will involve
09:45four things.
09:46One is we have to build
09:47more buffers
09:48across the board,
09:49identify the choke points
09:51in the economy
09:51that are choke points
09:52outside of energy
09:53related to China
09:54and where we can,
09:56number one,
09:56build buffers,
09:57number two,
09:57diversify imports
09:59where we can,
10:00number three,
10:01hedge prices,
10:02Mexico exports oil,
10:04it's called
10:05the Hacienda hedge.
10:06They basically hedge prices
10:07in financial markets globally.
10:10India should be hedging
10:11import prices
10:12so that we are protected
10:13from price movements
10:14and number four,
10:15potentially also allow
10:16more FDI from China.
10:18That's the best way
10:19to de-risk ourselves
10:20from imports from China
10:21which we're becoming
10:22so dependent on
10:23becoming a weaponized.
10:25So there's lots of lessons
10:26to learn from this
10:27once the crisis is over,
10:29you know,
10:29awaiting the next shot.
10:30Okay, I'm going to
10:32leave it there,
10:32Sajit Chinoy,
10:33as always,
10:34very valuable
10:34and knowledgeable,
10:36giving us a sense
10:37of really what
10:38the challenges are
10:39in this almost
10:40unprecedented situation
10:42that not just India
10:43but global economies
10:44find themselves in.
10:46Appreciate you joining me
10:47here on the show tonight.
10:49Thank you very much.
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