Recession?

As Katrina drenched New Orleans and the price of crude crossed $70, the magnitude of what has happened in the last 18 months dawned on me. Then, crude sold for about $30 a barrel. The relentless increase in oil prices has had little impact on the world's economic growth so far. But the continuing US budget deficit, the impending burst of their housing bubble, the tripling of interest rates amidst growing consumer debt, continuing unemployment and the trade deficit with China all point ominously towards a downturn. I can imagine that if the current state holds till December, the US might be pushed into a recession (primarily due to lower consumer spending). I have mixed feelings towards high crude prices of course, as I feel that this can induce further research into more environment-friendly energy souces. But a recession (a recession in the US will of course stall the rest of the world as well, especially becuase high oil prices will have an impact on various countries, independent of and in addition to, the reduced demand from the US).

The impact on India will be significant too. I think current domestic oil prices are based on a global price of $45-50. At some point, to prevent the liquidation of the oil PSUs, either the taxes on oil will have to be reduced or prices raised. It will probably be a combination of the two. Since a portion of the tax on oil products is percentage based, the government must have made a fair sum due to the rising prices. Still, due to their fairly reckless behaviour as regards economic reform and fiscal discipline, too much of a tax giveaway will not be possible. So we better brace ourselves for petrol costing about Rs. 60 a litre in Bombay, before fiscal 2006 is over. We could tide over the high prices nonetheless, but the government's complete kow-towing before the Left's non-sensical demands has left us vulnerable. No divestment, stalling of infrastructure projects, missing legislation on labour and pension reforms - all the Centre is doing now is maintaining the status quo and even regressing (for example, the rollback on commitments to eliminate the LPG subsidy by 2007).

Next fiscal year is not going to be very good, unless things improve soon. India has wasted one full year (just like we wasted 1-2 years when the NDA came to power in 1998 and 1999). And each year wasted is a year lost in the quest to improve the lot of the poorest of the poor. Economic forecasts, especially by engineers, are very uncertain and I myself would be pleased if things continue going well. But if I had to lay a wager now, it would be for a near-recession (below 1% growth) in the US and a mild downturn in India (around 5% growth) next year.