Export momentum dissipating but new opportunities opening up

Last week, Bangladesh Prime Minister Sheikh Hasina visited India to strengthen bilateral economic co-operation and India suggested greater economic cooperation with Russia at the Eastern Economic Forum in Vladivostok. Finance Minister Nirmala Sitharaman said importing Russian oil at discounted prices was part of inflation management.

On the other hand, Commerce Minister Piyush Goyal spoke of greater export potential through trade deals, crude oil prices went below $90 per barrel despite production cuts by major oil-producing countries and our government imposed a 20 per cent duty on rice exports.

Also, Japan and India agreed to increase cooperation in defence and emerging technologies, the European Central Bank raised interest rates by 75-basis points (bps), the chairman of US Federal Reserve flagged fighting inflation as the main concern, raising expectations of an interest rate hike by 75 bps, and the dollar strengthened further.

Speculation on what the new Foreign Trade Policy, to be unveiled this month-end, may contain has engaged the attention of exporters and importers.

However, all these matters receded into the background as widespread concern on how the European Union will cope with the disruption of gas supplies from Russia came to the fore.

Russia had suspended gas supplies to Europe towards the end of August under the pretext of maintenance issues. But last week, Russia clearly said that it will “not supply anything at all if it is contrary to its interests — no gas, no oil, no coal, no fuel oil, nothing.”

Europe has been preparing for this eventuality, that is, phasing out reliance on Russian oil and gas. However, this sudden suspension is bound to further increase the cost of living for its people and seriously disrupt its economic activities. However, the resolve to take the pain and make necessary adjustments is quite strong, at least for now. So, many measures such as capping the price of Russian oil and gas, income support to deserving sections of society, rationing gas supplies, finding alternative sources of energy, levy of tax on windfall profits of power producers, and so on, are under consideration.

In any case, a recession in Europe cannot be avoided in the short run at a time when Chinese and American economies are also slowing down.

Russia hopes to break Europe’s will to stay the course by pushing natural gas prices and overall inflation so high that Europe will stop supporting Ukraine or even relax sanctions on Russia. Europe just wants to get through the tough period and diversify its energy sources sufficiently and completely stop reliance on Russia. On its part, the United States is trying to negotiate deals with Iran and Venezuela to get oil flowing from these countries in return for relaxation in certain restrictions. It appears to be a case of when, not if, these deals will get done. Whenever that happens, oil prices may fall further.

India has increased oil purchases from Russia at discounted prices and appears open to persuasion for price caps on Russian oil so long as the capped prices are lower than the discounted prices. The export momentum has started dissipating due to the global economic slowdown but opportunities can be opening up in areas where Europe and America get less competitive due to inflation and strong dollar. Luckily, the domestic festive season demand appears strong enough to somewhat offset the effects of falling exports. 

email : tncrajagopalan@gmail.com