Is the global commodity supercycle over? – by Niranjan Rajadhyaksha (Live Mint – October 17, 2014)

It is too early to say whether the current decline in global commodity prices is temporary or structural

The sharp drop in global oil prices to their lowest level in four years has provided unexpected relief to the Indian economy. A barrel of the benchmark Brent crude cost around $114 in the middle of June.

It has slipped below $90 four months later. The impact is already becoming apparent. Petrol prices paid by motorists were cut in September.

One reason the Indian financial markets have held up better in the ongoing emerging markets sell-off is that India is a commodity importer that gains from a decline in prices. There is also greater confidence that the government will keep its fuel subsidy bill within the budgeted limit since global prices are well below the $110 a barrel that had been assumed in July.

And it is interesting that Indian monetary policy authorities are projecting inflation using a baseline assumption that oil will remain below $100 for the rest of the year.

The impact of lower global commodity prices on the Indian economy has been quantified. For example, economists at Nomura Financial Advisory and Securities (India) have estimated the likely impact of the fall in global crude prices on important macroeconomic numbers.

They say that every $10 decline in global crude prices will cut the current account deficit by 0.5% of gross domestic product (GDP), the fiscal deficit by 0.1% of GDP and retail inflation by 15 basis points (bps); real GDP growth will be up between 20-30 bps. One basis point is one-hundredth of a percentage point.

The impact of a secular decline in commodity prices on individual countries depends on where these countries are placed in the global division of labour. It is no rocket science that commodity exporters will lose out while commodity importers will benefit from the shift in the global terms of trade.

India is resolutely in the second category, which is why the recent decline in commodity prices is expected to benefit the economy. Chetan Ahya of Morgan Stanley points out in a recent research note that commodities account for 52% of the total Indian import bill while commodity exports account for just 9% of Indian exports.

India has a large appetite for commodities as an input for its economic growth as well as building spree. The investment bank also says that net Indian commodity imports have shot up from 1.9% of GDP in FY02 to 7% till FY12; the peak was 7.4% in FY08. There is a wide consensus that India will benefit from the overall decline in global commodity prices in recent months. A trickier question: is the ongoing price correction temporary or the first stage of a long downturn in global commodity prices?

In other words, is the commodity supercycle over? One indication that Indian policymakers have begun to think about this important question is evident in the analysis provided in a recent report by the Reserve Bank of India (RBI) that was released with the new monetary policy statement on 29 September.

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