Donald Trump’s moves turning deadly for Narendra Modi? Iran nuclear deal walkout spells trouble for India
US President Donald Trump on Wednesday walked out on the nuclear deal signed with Iran unleashing uncertainty in an already tight international oil market. As India is the net importer of oil, with Iran being the third biggest supplier, the decision to abandon the Iran nuclear deal by the United States will spell trouble for Narendra Modi on multiple levels, a report has said.
“The country and the Modi government have benefited from lower oil prices over the last few years… This gave India’s economic policymakers more fiscal space and Modi more political space—both of which will be hurt by much higher prices,” a Brookings report said. Experts see oil prices surging between $5-$10 a barrel if the sanction is re-imposed on Iran.
“Delhi will want to find a way to maintain as much of this supply as it can—including by seeking exemptions if possible,” the report said. Besides oil price, the concern is also geopolitical. Over the past few years, Narendra Modi has tried to build a diplomatic relation with the Middle East, which could be in jeopardy after the development.
“Delhi will also be concerned about the impact on its regional connectivity plans that have been driven by both geopolitical and geoeconomic interests. In the absence of a corridor through Pakistan, India has seen Iran as a potentially crucial transit route to Afghanistan and Central Asia,” the Brookings report said.
The Narendra Modi development did not react aggressively to the walkout but asked for a “peaceful resolution through dialogue and diplomacy by respecting Iran’s right to peaceful uses of nuclear energy”. A DBS report said that India may resort to looking for waivers from the US or going back to using a mix of barter and gold to settle payments. Donald Trump’s other moves such as waging trade war against China and tightening H1B Visa policies have also got analysts worried about its implications for India.
Looming US sanctions: India may not cut oil imports from Iran
US President Donald Trump’s move to reimpose sanctions on Iran after more than two years of reprieve given to the Persian Gulf country could keep global crude prices elevated in the short to medium term, analysts reckon. Imminent production cuts by Iran come at a time when global supplies are already hit by falling crude production in Venezuela, increasingly a key supplier to India. Even though only 10% of India’s oil imports was from Iran in FY18, a cut in oil exports by Opec’s third-largest oil producer could manifest in India’s twin deficits — current account and fiscal. Sweet-grade Brent crude has around 28% representation in the Indian import basket. “As far as quantity of import from Iran is considered, there are alternatives. Also, comparable grade of oil is also available. However, there were discounts given by Iran (which others may not offer),” said MK Surana, chairman and managing director, Hindustan Petroleum Corporation (HPCL).
Tehran provides Indian importers a credit of 90 days compared with around 30 days by other suppliers. Iran is the third-largest supplier for the country after Iraq and Saudi Arabia. Analysts feel that India could even keep the current level of purchases from Iran despite the US move. “While nations such as China, India and Turkey may oppose the US move and keep current levels of Iranian crude purchases, American allies including Japan and South Korea may comply because of concerns they could lose a security umbrella against North Korea,” Bloomberg quoted MUFG Bank as saying. According to Dilip Khanna, partner with EY, though there could be a negative impact on India, the fine print of the sanctions have to be seen.
“Since Europe is not part of the sanctions as was the case last time, it will not reset the clock to that extent,” added Khanna. Unlike the last sanction era when more than 1 million barrels per day became out of reach for the global market due to sanctions on Iran, at present, 300,000-500,000 barrels per day will be the impact given the country has not been able to ramp up its production since the sanctions. HPCL’s Surana added that India during the past sanction era India found out a way to trade with Iran (paying in rupees) and people have lessons from the past, adding that it is too early to take a call. Currently, India pays Iran in euros through European banking channels and if European nations are not part of the sanctions, it can continue to pay through the same channel. There is still time before sanctions are actually imposed. According to a Nomura report, “The Treasury Department noted that ‘Departments and Agencies will begin the process of implementing 90-day and 180-day wind-down periods for activities involving Iran that were consistent with the US sanctions relief specified in the JCPOA’.” The renewal date of sanctions is May 12, 2018.
Experts believe that the US move would bring uncertainty to prices. “The US calling off the nuclear deal with Iran and proposing sanctions on it is unsettling from a geopolitical viewpoint and will subject oil prices to huge volatility. This is, obviously, of grave concern to India, that imports more than 83% of its oil consumption,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu India. Brent crude oil jumped 3% on Wednesday and touched its peak since November 2014 at $77.20 per barrel. The Indian basket of crude on May 8, 2018, was at $73 per barrel.
Surana believes that the increase in price of Brent is speculative in nature rather than reflecting physical activities at the production sites. “Fundamentals suggest that (up to) $70 per barrel is normal crude oil price,” he added.
Trump has decided to withdraw JCPOA, also called the Iran Nuclear Agreement, which was agreed upon in 2015 with the UK, France, Germany, Russia, China wherein the Persian Gulf country was to curb its nuclear programmes in return of lifting financial sanctions.
Modi’s 12 ‘champion’ services sector to boost India’s growth to next level
With a view to boost country’s economic growth to the next level, Modi government is planning to formulate a separate strategy with different ministries to promote twelve services sector, PTI reported citing unidentified officials. These sectors include IT, tourism and hospitality. It was in the month of February that an action plan was approved by the Modi government for these ‘12’ champion services sectors for realising their real potential through establishment of a Rs 5,000 crore dedicated fund. The 12 champion sectors include IT & ITeS, Tourism and Hospitality, Medical Value Travel, Transport and Logistics, Accounting and Finance, Audio Visual, Legal, Communication, Construction and Related Engineering, Environmental, Financial and Education.
The government is specifically looking at these sectors and developing a plan with the line ministries on that, PTI reported citing Commerce Secretary Rita Teaotia. In the plan, the government is looking at areas like “do we have the right regulatory framework for the growth of that sector?, do we have right service standards at place; what are the infrastructure gaps and how to address that or any other bottlenecks,” PTI reported citing Commerce Secretary.
Rita Teaotia also informed that a plan is in the final stage to use Rs 5,000 crore fund as the plan is being developed for each of these 12 champion sectors. Under the chairmanship of cabinet secretary, a committee is being established to review all these plans, PTI reported citing her.
Champion sectors to push growth
Boosting these twelve champion sectors will help in pushing overall economic growth and job creation, she said. In order to increase value addition and promote exports and push MSME sector, she said that ministry is working on various areas such as efficient logistics management, involving states, and increasing international engagement. After a gap of four months in the month of March India’s exports dipped. The exports contracted by 0.66 percent to $29.11 billion due to negative growth in various key sectors of the economy.
Big cheer for Modi ahead of Karnataka election! India fastest growing economy in 2018: IMF
The International Monetary Fund (IMF) reaffirmed on Wednesday that India will be the fastest-growing major economy in 2018, with a growth rate of 7.4 per cent that rises to 7.8 per cent in 2019 with medium-term prospects remaining positive. The IMF’s Asia and Pacific Regional Economic Outlook report said that India was recovering from the effects of demonetisation and the introduction of the Goods and Services Tax and “the recovery is expected to be underpinned by a rebound from transitory shocks as well as robust private consumption.”
Medium-term consumer price index inflation “is forecast to remain within but closer to the upper bound of the Reserve Bank of India’s inflation-targeting banda of four per cent with a plus or minus two per cent change, the report said. However, it added a note of caution: “In India, given increased inflation pressure, monetary policy should maintain a tightening bias.” It said the consumer price increase in 2017 was 3.6 per cent and projected it to be five per cent in 2018 and 2019.
“The current account deficit in fiscal year 2017-18 is expected to widen somewhat but should remain modest, financed by robust foreign direct investment inflows,” the report said. After India, Bangladesh is projected to be the fastest-growing economy in South Asia with growth rates of seven per cent for 2018 and 2019; Sri Lanka is projected to grow at four per cent in 2018 and 4.5 in 2019, and Nepal five per cent in 2018 and four per cent in next. (Pakistan, which is grouped with the Middle East, is not covered in the Asia report.)
Overall, the report said that Asia continues to be both the fastest-growing region in the world and the main engine of the world’s economy. The region contributes more than 60 per cent of global growth and three-quarters of this comes from India and China, which is expected to grow 6.6 per cent in 2018 and 6.4 per cent in 2019, it said.
‘Weakest business sentiment in 4 years’: India slips to 6th position globally in business optimism index
With business sentiment at the “weakest” in four years, India slipped to the 6th position globally in the business optimism index for the first quarter of this year, says a survey. Business optimism is however at an “all-time high” globally with the index at net 61 per cent, the highest figure recorded in 15 years of research, as per Grant Thornton’s quarterly global business survey released. Noting that business sentiment in India has been the weakest since 2014 in the first quarter, the advisory firm said the confidence has been shaken since the third quarter of 2017 with weakening currency and a surge in oil prices. “While entering the last year of the current regime, the business optimism in India has deteriorated with the country ranking 6th globally on the optimism index in the first quarter of 2018… India has been topping the chart since the new government came into power in 2014,” Grant Thornton’s International Business Report said.
With a score of 89, India is at the sixth place in the index. The top five nations are Austria, Finland, Indonesia, the Netherlands and the US. The conclusions are based on a quarterly global business survey of 2,500 businesses in 37 economies. With regard to India, Grant Thornton said the underlying pessimism is reflected in other parameters as well including revenue, selling prices, profitability, employment and exports expectations.
Indian businesses have been citing regulations and red tape, availability of skilled workforce, lack of ICT infrastructure and shortage of finance as the biggest growth constraints. Even after India’s significant jump in World Bank’s Ease of Doing Business ranking, the country still continues to rank 1st or 2nd in quoting these reasons as the key hurdles for growth, it noted.
Prime Minister Narendra Modi-led NDA government came to power in May 2014. Grant Thornton India LLP CEO Vishesh C Chandiok said the reversal in sentiment amongst mid- sized business in India in the last three quarters is startling and hoped that policy makers would sit up and take note. “With oil climbing, and India firmly in an election year, we ought to brace for a volatile economic environment in the days ahead. Export oriented businesses should see better days, finally,” he added.
Cost of Modi’s gst, demonetisation: here’s what Indian economy lost that rest of the world did not
Even as the economy recovers from the structural shocks of GST and demonetisation, India missed out on a ‘synchronized global recovery in 2017,’ according to a latest report by IIF (Institute of International Finance). Taking stock of the impact on the economy due to these disruptions, IIF said, “As a result of these shocks, India missed out on the synchronized global recovery and growth in 2017 was a percentage point below its long-term average.”
The global economy was indeed robust in the previous calendar year, as a recent report by IMF said that global output is estimated to have grown by 3.7 percent in 2017, which is 0.1 percentage point faster than projected in the fall and ½ percentage point higher than in 2016.
Taking stock of the impact of note-ban reform, IIF said, “Demonetization in late 2016 affected 85% of cash in circulation and activity took a deep hit as distribution of new banknotes was slow. The effects on money aggregates were long lasting.” According to the Institute, currency in circulation and broad money are still 2 and 6 percentage points of GDP below pre demonetization levels. Further, on GST, the report said that while the reform is positive for medium-term growth it has also caused a short-term disruption.
IIF explains that GDP growth was already weakening before demonetization, but the note ban reform depressed consumption and investment further. “A temporary increase in public consumption softened the blow in the first half of 2017 but GST implementation hit just as the economy was recovering from demonetization,” the report said.
Currently, consumption growth is yet to return to pre-demonetization levels but investment ‘bounced back’ despite uncertainty surrounding the rate structure and exemptions of the new GST. Taking stock of exports, IIF noted that weak net exports due to persistent real exchange rate appreciation also weighed on growth significantly.
Going forward, the Indian economy is turning the corner, as it ‘leaves behind’ these two shocks and implements policies such as public-bank recapitalization, IIF pointed out. “Waning exchange rate appreciation pressures and improving credit growth will support a rebound in exports and investment,” it added.