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As markets crashed around the world this week, Prime Minister Narendra Modi saw a chance to revive his stalled reform agenda.
India is among the best positioned in Asia to benefit from cheap oil, and it's partly shielded from China's economic tumult. That gives Modi additional time to focus on proposals that would be more difficult to pass if oil prices were stoking inflation. "They clearly have this favourable opportunity," Rajeev Malik, a Singapore-based senior economist with CLSA Asia-Pacific Markets, said of Modi's government. "It's not a question of ability, it's really about willingness."
Legislative wins for Modi would help bolster sentiment in emerging markets like India that were pummelled in the global stock rout. India is projected to overtake a slowing China as the world's fastest-growing major economy.
The plummeting price of oil has key benefits for India, which depends on imports for more than 75 per cent of its consumption. Foreign exchange reserves increased 13 per cent during the past year, inflation more than halved since January of 2014 and the current account deficit narrowed by 93 per cent in about 24 months.
Moreover, India is less exposed to the Chinese slowdown than others in the region. While exports to China accounted for only 5.2 per cent of India's total last year, the figures for Singapore, Vietnam and Indonesia were more than twice as high. For Thailand and Malaysia, it was triple.
"It's important not only for Asia but the world that there are other growth drivers, growth poles, to keep global growth going," said Robert Subbaraman, chief economist for Asia, excluding Japan, at Nomura Holdings Inc in Singapore. "Out of the big emerging market economies, one of the ones best placed to do that is India." Indian Finance Minister Arun Jaitley told reporters on Monday evening that Modi is aware of the bigger picture. Earlier in the day, the S&P BSE Sensex index had fallen the most since 2009.
"The prime minister was particularly of the opinion, since the economic fundamentals were sound, we need to take measures in order to further strengthen the economy," Jaitley said. "This would ensure that the global crisis could be converted into an opportunity."
Political bickering
So far, though, Modi's government hasn't implemented any big structural reforms. Measures that might help attract investors - a unified tax regime, and easier land acquisition - are mired in India's parliament.
Leadership from both Modi's party and the political opposition, which controls the upper house, spent their days bickering in parliament and their evenings shouting on Indian TV news talk shows. Modi is still hoping to recall lawmakers in the next few weeks after the least productive parliamentary session since he took office, but his opponents have yet to budge.
"The focus in the past 18 months has been to play the art of politics in a skillful way," said Sandeep Shastri, vice- chancellor at Jain University in the southern city of Bengaluru and an author on Indian politics. "That explains why several segments of the economy, which expected much more from the government, are disappointed."
While Modi eliminated subsidies for diesel last year, he's balked at doing the same for cooking gas, kerosene and fertiliser. India spent more than twice as much on oil-related subsidies than health in the last financial year through March, showing the risks if prices spike again. Oil has fluctuated below $40 a barrel this week as concern over slowing demand in China fueled volatility in global markets. Even with oil prices that are 60 per cent lower than in 2013 on average, India's economy has still struggled. Infrastructure programs, consumer spending and the industrial sector have all failed to take off, said Sailesh Jha, chief Asia economist of Credit Suisse Group AG Private Banking and Wealth Management.
"Declining oil prices doesn't mean an economy recovers," he said by phone from Singapore. "Indian reforms which are necessary to get growth going, they simply haven't panned out."
Central bank Governor Raghuram Rajan underlined the dilemma in a speech this week.
"The question for us as a society is whether we have the discipline to do what is necessary at a time when global conditions are propitious," he said. "We must remember that what sets poor nations apart from the rich is not people or resources or even luck but good governance."
