From Bill Clinton to Vajpayee, every one has tried to impress upon the OPEC nations about keeping the oil prices under check. One does not know at this point of time, where the barrel will settle down. May be not below $32. This oil rise is going to leave its ravages on all economies, including that of India. Fund managers may well figure out the shape of things likely to come now, and build it into their future forecast. In the earlier instances when oil spiralled out of control in the late 1970's and later in 1990, inflation did rise and recession raised its head.If fund managers have not felt the heat so far, it could well be that the mood in the global market place is upbeat. Recovery in south east Asia continues. Japan is trying desperately to get on to the growth path. The US economy is riding on the back of techno-driven efficiency. The Euro is getting stronger.
The oil crisis is hardly over. The price of oil could still touch $40, given that stock piling for winter has not taken place in North America. Soon there will be no escape from letting the cost of oil pass through to the lower levels of the economy. In India the government still has the option of absorbing the oil pool deficit rather than passing on it down the line in the normal way.
But whichever way you do it, the impact on inflation cannot be stopped. Only you can spread it on wider sections of the economy and get away with it avoiding any severe shocks to the industrial sector. But surely there would be an impact on demand for goods, as also the profit margins for the corporate sector.
It will take quite a while for the government to activate the new agricultural policy and hope for that segment to buffer others. The Central Bank may well have to start its exercises now as to how it would tackle inflationary pressures some six months down the lane. The pressure would transmit itself into the exchange rate as well. Investors in software industry might feel gleeful at this prospect. But given that inflation will afflict all economies, a new dynamic balance will come into being. So any facile assumption of high profit margins will be misplaced.
Wage rates would go up and in turn would turn the screws on the corporates, whether in US or India, to do belt tightening. Those concerns apart, there would be more challenges in the macro-economic scenario. Central bankers would have a challenging time as to how they would like to tune into the inflationary pressure. It would be difficult to strike up a perfect tango and there are bound to be mismatches in timing. That in turn is likely to lead to volatility in business cycles. While all this is worrying, yet I see one community which would enjoy the unfolding scenario, the community of global fund mangers. They would have an excellent time batting around, predicting cycles and playing their bets.
K Seshadri
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.