Oil Price Slips
In a continuing trend crude oil slipped to $30 per barrel to a near 12 year low. Prices are down around 16 per cent since the start of the year.
Between 2010 and 2014, oil demand was soaring around the world, as countries recovered from the financial crisis, but global production was struggling to keep up. Many older oil fields were stagnating. Conflicts in places like Libya and Iraq were restricting supply. Countries had to draw down their stockpiles, and prices soared to around $100 per barrel.
Those high prices, however, spurred more and more drillers in the United States to use innovative hydraulic fracturing and horizontal drilling techniques to unlock vast quantities of oil from shale formations in places like North Dakota and Texas. It’s hard to overstate the impact of the fracking boom: US crude oil production has nearly doubled since 2010.
This led to a greater supply than demand which led to fall in prices. The trend is expected to continue owing to a supply glut as OPEC continues to not cut production in order to maintain market share, easing of sanctions on Iran, and slowing of demand from China. A major reason is also the escalating tensions between Sunni dominated Saudi Arabia and Shia majority Iran.
Analysis: Impact on India
1) Current Account Balance – India is one of the largest importers of oil in the world. It imports nearly 80% of its total oil needs. This accounts for one third of its total imports. For this reason, the price of oil affects India a lot. A fall in price would drive down the value of its imports. This helps narrow India’s current account deficit – the amount India owes to the world in foreign currency.
2) Inflation – Oil price affects the entire economy, especially because of its use in transportation of goods and services. A rise in oil price leads to an increase in prices of all goods and services. It also affects us all directly as petrol and diesel prices rise. As a result, inflation rises. A high inflation is bad for an economy. It also affects companies – directly because of a rise in input costs and indirectly through a fall in consumer demand. This is why the fall in global crude prices comes as a boon to India.
3) Government Subsidy Burden – The government fixes the price of fuel at a subsidised rate. It then compensates companies for any loss from selling fuel products at lower rates. These losses are called under-recoveries. This adds to the government’s total expenditure and leads to a rise in fiscal deficit – the amount it borrows from the markets. A fall in oil prices reduces companies’ losses, oil subsidies and thus helps narrow fiscal deficit. Â The price of diesel and petrol have now been deregulated, following international prices.
4) Rupee Exchange Rate – The value of a free currency like Rupee depends on its demand in the currency market. This is why it depends to a great extent on the current account deficit. A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.
5) Petroleum Producers – The fall in global oil prices may be beneficial to India, but it also has its downsides. Directly, it affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world, according to media reports. This helps it earn $60 billion annually. Any fall in oil prices negatively impacts exports. At a time when India is running a trade deficit – high imports and low exports, any fall in exports is bad news. Moreover, a lot of India’s trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products. This would indirectly affect India and its companies.
Start Up India
India surpassed China and Israel recently to own the third largest startup ecosystem, after UK and the US. In 2015 alone, the total funding received by 850 Indian startups via 1,005 deals was a whopping $9 billion.  Yet, according to World Bank’s Doing Business Report 2016, India has the 42nd position in terms of ease of accessing credit, which proves the difficulties in getting loans in India, especially for startups.
Prime Minister Narendra Modi is set to announce the much-awaited ‘Startup India, Stand up India’ campaign on Saturday, January 16. The department of industrial policy and promotion – which is organising the day-long show where Prime Minister Narendra Modi is expected to announce a new deal for start-ups.
Analysis: State of startup ecosystem in India
Encouraging startups is essential in a country where 80 per cent of the population is under the age of 40, and unemployment is rising along with population. Taking a leaf out of other countries’ policies, India could become friendlier towards its entrepreneurs and investors; think of Singapore which incentivised its investors, or Israel which invested 4.3 per cent of its GDP in R&D.  The UK too offers discount and tax subsidy for investing.
The states in India have taken many initiatives to promote start-ups.
Kerala government’s startup policy—Kerala IT Mission—was announced in 2014, aiming to attract Rs 5,000 crore in investments for the State’s startup ecosystem. Having established India’s first telecom incubator Startup Village in 2012, the State also promised 10 accelerators as well as one million sq.ft. of incubation space. According to the policy, one per cent of the annual State Budget will be deducted for ‘youth entrepreneurship activities’ till 2019.  Besides encouraging banks and financial institutions to extend lending to the startups on convenient terms, the government may participate in SEBI-approved early-stage venture capital funds, up to 25 per cent as limited partner. Additionally, the State will match the funding raised by its incubator from Central government on a 1:1 basis as matching grants.
Telangana also came forward, providing ‘Telangana Academy for Skill & Knowledge’ (TASK) for entrepreneurial training. The youngest State in the country, Telangana made headlines when it launched the largest incubation centre in India, named ‘T-Hub’, a year ago, to be followed by its second phase in 2015.
Andhra Pradesh provided a 17,000-sq.ft. lab—Technological Research and Innovation Park—as well as an ‘Initial Innovation Fund’ of Rs100 crore for entrepreneurs. It shall participate in the capital of SEBI-approved VC funds, up to 15 per cent as limited partner. A ‘Single Window Clearance Unit’ will be created for granting approvals, and another for tax and registrations.
Rajasthan launched its elaborate startup policy in October 2015. After the launch of ‘Start-up Oasis’, the Incubation Centre of RIICO at Jaipur in 2013, Rajasthan seemed to have taken the nurturing of startup ecosystem very seriously. The State policy has promised a sustenance allowance of Rs 10,000 per month for a year to idea-stage startups, post approval by the nodal institution. It also facilitated free mentoring and access to facilities at the incubator, and, for selected startups, free access to State universities. Pilot-stage startups have been offered marketing assistance of up to Rs 10 lakh.
Source: Yourstory
Inflation and IIP data
The industrial output for November came at -3.2% as against 9.8% in October and an upward movement in the retail inflation at 5.61% in December compared with 5.41% a month before. Â The IIP fall was sharpest since October 2011.
The IIP figures on Tuesday showed there was weakness across all segments with the biggest dip coming in manufacturing and electricity. Manufacturing in November shrank 4.4% from a growth of 4.7% in the previous month, which indicated more than nine percentage points drop even as electricity barely grew at 0.7% compared with the 10% growth in the same month last year. Mining was also weak at 2.3% in November against 4% a year back. Capital goods contracted 24.4% in November compared with 7% expansion last year. Consumer goods production climbed marginal by 1.3% during the same period.
On the other hand, Consumer Price Index (CPI) in December further hardened with food prices remaining high due to the near-drought situation in the country, which has resulted in scarcity of food and food products.
Analysis: Closer Look at the Data
Finance Ministry attributed the decline in November industrial production to a four-year low to statistical reasons, particularly due to lesser number of working days due to Diwali and the impact of Chennai floods.
So, broadly what I feel is that data are consistent with what we said in the Mid-Year Analysis that economy is probably recovering but sending mixed signals, some good, some scope for improvement,” Chief Economic Advisor Arvind Subramaniam said.
Subramanian added that oil prices have gone down even further, thus there is cushioning of inflationary pressures.
On the other hand, the December tax-revenue numbers were also quite robust. Revenue growth is about 10.6 percent. Inflation number was affected by pulses. Pulses prices increased by some 45 percent, that obviously had an impact,” he added.
Source: DNA
