The oil industry, with its history of booms and busts, appeared to be in the early stages of its latest downturn past few months. The price of oil which had plunged time and again reached its lowest point in more than five years.

WHAT ACCOUNTED FOR THE PRICE DROP? 

This is a complicated question, but it boils down to the simple question of supply and demand. The United States domestic production nearly doubled over the last six years, which pushed out oil imports and that needed to find another home. Saudi Arabia,  Nigeria, and Algerian oil that once found home in the United States suddenly started to compete in the Asian markets , and the producers were forced to drop prices. On the demand side, the economies of Europe and developing countries statted weakening and vehicles started to become more energy efficient. So the demand for fuel started to lag a bit.

WHO BENEFITED FROM THIS PRICE DROP? 

Drop in oil prices was certainly a good news for consumers especially motorists across the world. According to Moody’s Investor Service’s Chief Economist , Mark Zandi, who quoted in his Bloomberg report that if oil price stayed at $60 a barrel, American consumers would save a whopping $150 billion on their fuel bills which, according to him, will be spent therefore elsewhere, driving economic growth. This would hold true even for other countries as well, like India. And which was observed to be true!

WHO LOST IN THIS GAME?

For starters, oil producing countries and states. Venezuela,  Iran,  Nigeria, Ecuador, Brazil and Russia are just a few petro states that suffered economic and perhaps political turbulence.  Persian Gulf states were thought to invest less money around the world and cut in the aid to countries like Egypt. In the United States, Alaska,   North Dakota,  Texas, Oklahoma, and Louisiana faced economic challenge s. Some smaller oil companies that were already in debt heavily went out of business , which pressurised some banks that lent to them.

WAS THERE A CONSPIRACY TO BRING DOWN THE OIL PRICES? 

There were a number of conspiracy theories floating aroubd at the time of price drop. Even some of the oil executives quietly noted the possibility that the Saudis wanted to hurt Russia and Iran, and so did the United States – motivation enough for the two oil producing nations to force down prices. Dropping prices in the 1980s did help bring down the Soviet Union after all. But there is no evidence to support the conspiracy theories and Saudi Arabia and the United States rarely coordinated smoothly. And the Obama administration was hardly in a position to coordinate the drilling of hundreds of oil companies seeking profits and answering to their shareholders.

WHEN WERE THE OIL PRICES THOUGHT TO RECOVER LIKELY? 

Not anytime in the nearing future. The oil production still increased in the United States and some other countries. Many Wall Street Bank even predicted the oil price to fall further further and go as low as $40 a barrel .

WHAT HAPPENED TO THE ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES (OPEC) ?

The price of oil, as with other commodities, goes up and down. And in the past, the Organization of the Petroleum Exporting Countries,  known as OPEC, has frequently cut production to firm up prices. Iran, Venezuela and Algeria were pressing the cartel to do so again , but Saudi Arabia, the United Arab Emirates and the other Gulf allies were refusing to cut. At the same time, Iraq  was actually pumping more. Saudi officials said that if they cut production and prices go up, they will lose market share and and merely end up benefiting their competitors.

OPEC’s role : Established in 1960, OPEC’s objective is to coordinate and unify petroleum policies amon the member countries to secure fair and stable prices for petroleum producers.

INDIA’S ANGLE

As far as India was concerned, a lot depended on how well the government exploited the low price scenario. For one may think, it should use the chance to clean up its subsidy act once and for all, mainly in cooking gas and fertilizers and the government should also ensure market prices for oil producing PSUs -ONGC and OIL- so that they can invest in exploration and production.

PRICE OF OIL: TIMELINE

● During 1999-mid 2008, oil prices were rising sharply because global demand was surging,  especially in India and China, and there wasn’t enough oil production to keep up.

● In the middle of the financial crisis odf 2007-2008, after reaching the record peak of US $145 it reached in July 2008,this price of oil underwent a significant decrease .

● Cude oil spot price fell to US $30.28 a barrel on December 23, 2008 , the lowest since the financial crisis of 2007-2010 began. The price sharply rebounded after the crisis and rose to US $82 a barrel in 2009.

●In 2014, prices started declining due a significant increase in oil production  the US, and declining demand in the emerging countries.

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WHAT IS FDI?

It refers to an investment made by a foreign individual or company in the productive capacity of another country. It can be considered as the movement of capital across national frontiers in a manner that allows the investor to have control over the investment. Firms that provide FDI are referred to as MNCs.

WHY IS FDI NEEDED?

FDI pays a major role in developing countries like India. They act as a long term source of capital as well as advanced and developed technologies. The investors also bring along best global practices of management. As a large amount of capital comes in through these investments, more and moe industries are set up. This helps in increasing employment. FDI also promotes international trade.

MAJOR SECTORS THAT ATTRACT FDI

Some of the sectors that attract high FDI inflows in India are the hotel and tourism industry, insurance sector, telecommunication, real estate , retail,  power , drugs, financial services,  infrastructure, pollution control etc.

WHAT IS A GREENFIELD PROJECT? 

A type of venture where finances are employed to create a new physical facility for a business in a location where no existing facilities are currently present.

GOVERNMENT MEASURES PAY OFF

● According to experts, several ‘Make in India’ and ‘Digital India’ like initiatives which were launched to lure investors have paid off. The government is trying to ensure that the country moves up the ranking on the World Bank’s Ease of Doing Business parameter. The clean up act has been started by the other states.

● Investors have started taking interest in the India growth story and the recent visit of Modi to the Silicon Valley triggered enormous interest from software and technology czars.

● Growth is expected to be one of the fastest in the world and several multilateral agencies have said that India remains the bright spot among emerging economies.

ECONOMY ON THE RIGHT TRACK

●India is tracked well ahead of where it was placed at this time last year: it has more than doubled its mid year investment levels, attracting $30 billion by the end of June 2015 compared with $12 billion in the first half of the last year.

● India’s achievement this year is particularly significant, considering that 97 of the 154 countries that are counted as emerging markets are seeing a decline in capital spend year on year in the greenfield projects.

● Significantly , in 2014, India ranked fifth after China in terms of capital investment, the United States and United Kingdom and Mexico.

● Experts say India is expected to benefit from the slowdown in China and the overall sluggishness in the global commodity prices including crude oil is expected to provide a cushion to the growth fortunes of India.

ANGELA MERKEL IN INDIA

German chancellor Angela Markel, who came on an official visit to India and held bilateral talks with PM Narendra Modi in New Delhi. The discussions between the two leade covered a lot of issues including security and defence, with special focus on boosting trade ties. The talks between the two leaders aimed at deepening bilateral engagement in education,  renewable energy,  science and technology, skill development,, railways, waste management,water and , urban development and agriculture.

German’s investments in India stand at 9.7 billion euros with about 1600 companies in the country.  Modi officially visited Germany last April when he sought to attract more industries to set up shop in Asia’s third largest economy for ‘Make in India’ campaign and boost the manufacturing sector. This agreement that India and Germany signed to fast track business approvals, an agreement to make it easier for German companies to operate in Asia’s third largest economy. This agreement is the first of its kind and comes as Prime Minister Narendra Modi seeks to attract FDI in support of his make in India drive to boost industrial investment and create skilled jobs.

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Throughout the history, many species of animals have been threatened with extinction. When Europeans first arrived, more than 60 million buffalo roamed the continent of North America. Yet hunting the buffalo was so popular during the nineteenth century. It was such that by 1900 the animal’s population had fallen to about 400 and so the government had to step in to protect the species. In some African countries today, the elephant faces a similar challenge, as the animals are killed by the poachers for the ivory in their tusks.

Yet not all animals with commercial  value face this threat. The cow, for example,  being a valuable source of food, but have you seen anybody worrying about the cow being extinct. No! Indeed, the great demand for beef surely ensures that the cow population will continue to thrive.

Why does the commercial value of ivory threatens the elephant while the commercial value of beef protects the cow? The reason is that elephants are a common resource while cows are a private good. You must have seen elephants roaming freely without any owners. Each poacher has a strong incentive to kill as many elephants as they can manage to find. Being so numerous, there is only a slight incentive that the poachers have to preserve the elephant population. By contrast, cattles that are privately owned live on ranches. Each rancher thus makes great effort to maintain the cattle population on his ranch because of the benefits which he reaps out of his efforts.

Governments have tried to solve the elephants’ problem in two ways. Few countries, such as Tanzania, Kenya and Uganda,  have made it illegal to kill elephants and sell their ivory. Yet these laws have been hard to enforce, and the elephant populations have continued to dwindle. By contrast, other countries,  such as  Namibia, Malawi, Zimbabwe and Botswana,   have made elephants a private good by allowing people to kill only those elephants that are on their own property.  The landowners now have an incentive to preserve the species on their own land, and as a result, a rise in the elephant population has been observed. With  the profit motive and private ownership now on its side, the African elephant might someday be as safe from extinction as the cow.

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After the worst happenings in one single day, (in absolute terms) of 1625 sensex points and a sharp rupee depreciation of 82 paise against the dollar, now the currency and stocks bounced have back on August 25, gaining 291 points and 55 paise respectively. But even amid the mayhem of August 24,triggered by a slowing Chinese economy and devaluation of the yuan, most economists maintained that the prospects of India’s growth were brighter than those of other emerging markets. The optimism is supported by the IMF’s protections for 2015.Here’s why:

●GDP growth estimated to be 8% in 2015-16

India is considered to be a bright spot in the global economy. Infact, International Monetary Fund (IMF) has said that for the second consecutive year, India will be the world’s fastest growing economy. In its World Economic Outlook Update released, IMF retained India’s growth protection for the current year at 7.5 per cent, which will be higher than China’s 6.8 per cent. It forecast a growth rate of 7.5 per cent for India in 2016 as well, as against China’s 6.3 per cent.

●Improving industrial output

The factory output has accelerated since the last few months. The Index of Industrial production (IIP) which is an index for India which gives the detailed growth of various sectors in the economy such as mining, electricity and manufacturing, grew 3.8 per cent in June from 2.5 per cent in May. There has been a significant pickup in consumer goods rising 6.6 per cent, mostly because of a 16 per cent jump in output of consumer durables such as television sets and refrigerators.

● Healthier government finances

Improved tax collections,  led by indirect tax growth of 37.6 per cent during April-July ; lower subsidy bill due to falling oil prices has been a bonus for the government.  Experts say our expected savings may be around Rs 1 lakh crore.

●Inflation-both retail and wholesale-under control

While crude oil prices still falling,  inflation is still under control and is expected to remain low for a while. Retail inflation also fell to a multi year low in July on account of cheaper prices of food , including vegetables, fruits and cereals of 3.78 per cent.

●Forex reserves

At a record $355 billion,  India is positioned safe vis-a-vis other economies. Foreign currency assets, expressed in dollar terms, include the effect of appreciation and depreciation of non US currencies such as euro, pound and the yen, held in the reserves.

BUT THERE ARE PRESSURE POINTS

● Sluggish credit growth. Growth in non food bank credit off-take slowed to 8.4 per cent in June 2015, compared with 13 per cent in June 2014.

●High bank NPAs estimated at around 5.75 per cent of gross assets.

●Falling exports. Declined 10.3 per cent in July.

●Several companies have stresse balance sheets,  particularly infrastructure firms.

●Low demand in construction sector.

●Falling rupee may impact FII inflows; slowing Chinese economy and possible rate hike by US Fed add to market fears.

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What? What did you just say? Pros of fall in rupee? Are you in your senses? … Some of you might be wondering this. And actually am I in my senses? Yes. Yes. Dont worry!  I am in my proper senses. ? This article will tell you how.

A sharpfall in the rupee to an all time low against the US dollar may have sent the markets reeling, the domestic tourism industry which expects to welcome more foreigner tourists will augur well this upcoming peak season starting from October. India now seems to be a more attractive tourist destination as tourists tend to save 5-10 per cent on travel in the country.

Yatra.com’s president Sharat Dhall view this dip as a boon for the tourism industry as he is expecting a lot of travellers from Western Europe and the United States, especially the long time travellers since the overall cost of travel to india has reduced now.

The tourism industry has already seen a 10 % growth in the past few years. But this year due to a stronger dollar coupled with the e-tourist cvisa facility extended ny the government to 77 countries, could result in a 15-20 % uptick in the number of tourists from US, UK, and Europe during the upcoming season.

The rupee fell down by about 4.3% since China announced the devaluation of its currency yuan. While the inbound tourism industry rejoices this fall in the rupee, the outbound tour operators face concerns among prospective travellers as now they will have to cough up more on foreign trips at the current exchange rates. The trips have become as expensive as 10 % for the Indian travellers due to fall in rupee and which has seen a drop in foreign queries to 18% of total queries in August from 25% in June and even the big group movements are seeing a slowdown in decision making as these groups work mainly on budgets.

Tour operators said the falling rupee will make expenses such as  local transfers and accomodation which have now become expensive in outbound tours since overseas hotels and destinations quote their prices in US dollars.

Travel to destinations like Dubai, Singapore and Bangkok if booked now is a little more expensive than if they were booked a week or two earlier.  The outbound season usually starts in October and continues upto January.  The foreign travel packages have turned costlier by Rs 5000 to Rs 8000, according to the industry estimates. However the devaluation of currencies of certain countries like Malaysia,  Thailand, Hong Kong, Far East, Turkey and South Africa vis-a-vis the dollar has fueled more travell to these destinations. The on ground expenses in these destinations may get cheaper as food and accomodation will become cheaper due to fall in rupee and so people are shifting their preferences now to these countries or to the domestic destinations rather than travelling abroad.

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Reserve Bank governor Raghuram Rajan has said that there is a pick-up in the economy and expressed hope that rural demand will get stronger if the monsoon improves. Excerpts from an interview with the RBI chief. . .

ON ECONOMY: We do believe that there is a pick-up. RBI continues to watch the progress of monsoon to assess the overall impact on inflation as well as global developments. You may see rural demand coming back more strongly, and that would be a tremendous bonus to the economy relative to where we are.

ON CHINESE DEVALUATION: Chinese devaluation is a worrisome trend. The move to devalue the currency and protect its stock markets raise questions about ‘true strength’ of the world second largest economy. Moves like these, where countries devalue currencies due to low demand, can lead to a “free for all” at the global stage.

ON PAYMENTS BANKS: Payments banks and small finance banks will help deepen financial inclusion in the country. It will complement universal banks. Payments banks will help reduce costs for customers.

MEANWHILE, RBI CLEARS 11 PAYMENTS BANKS. WHAT ARE PAYMENTS BANKS? 

●RBI has cleared 11 entities,- including department of posts, top conglomerates such as Reliance Industries and Aditya Birla Group, telecom giants like Airtel and Vodafone,  and a number of tech and finance companies- to set up ‘payment banks’.

●Unlike ‘universal banks’-as regular banks are called-payment banks can accept deposits upto Rs 1 lakh only and cannot grant loans.

●They can only deposit their money in government bonds. They can issue debit cards, but no credit cards. Other than this, they can provide all services of a universal bank.

●WHAT DOES IT MEAN FOR CUSTOMERS?

The service charges will come down and and here, the requirement of minimum monthly/quarterly balance is unlikely to be applied.

STATE OF INDIAN ECONOMY

●The government has been targeting growth to come at over 7.8 per cent for the fiscal and gradually accelerate further to close to double digits.

●RBI had also cut its growth projection in the June policy statement to 7.6 per cent , and maintained it in August month review.

●India’s factory output grew 3.8 per cent in June compared with 2.5 per cent a month ago.

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The stock market benchmark Sensex plunged by more than 1200 points and the rupee nosedived to a two year low till noon- making it the biggest crash in about seven years and the fourth biggest ever for the Bombay Stock Exchange benchmark index. Besides global developments, analysts cautioned that the slide in the rupee value,  which closed on August 21 at a two year low of 65.83 to a dollar to breach the 66 mark, also dampened sentiments. Asian markets were also in deep red with Shanghai shres crashing eight per cent on concerns that the Chinese economy was slowing more than previously thought.

WHY IS SENSEX IN FREE FALL? 

●Asia stocks at 3-year lows

Asian stocks dived to three year lows as a rout in Chinese equities gathered pace, hastening an exodus from riskier assets as fears of China-led global economic slowdown roiled world markets.

●Global cues

Global stock markets are tumbling after a survey showed Chinese factory activity contracted at their fastest pace since the depth of the global financial crisis in 2009. Fears of a China-led global economic slowdown also drove Wall Street, previously seen as a safe haven, to its steepest in nearly four years, on August 21.

●Rupee at lowest since September 2013

The sliding rupee is yet another cause for worry. It slumped to as low as 66.48 per dollar on Monday morning.

●Moody’s lowers India’s growth forecast to seven per cent

The predictions by Moody have also made investors sceptical.  Fears over deficient rains in the current monsoon season and gradual progress of reforms have prompted global credit ratings agency Moody’s to lower India’s growth forecast for this year by 50 basis points to  seven per cent.

I wish to reassure the markets that our macroeconomic factors are under control as the economy is in a much better position relative many other economies.  The country has $380 billion in forex reserves to be used as and when need arises.

Raghuram Rajan, RBI governor

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Despite lingering concerns over a growth revival, Indians are more optimistic about the state of the economy than they were a year ago, says a new study. According to the study by Pew Research Center,  74 percent of Indian believe the country’s economic conditions are good, a ten percent jump from a year ago. They believe their children will have a better future than they did, against 67 percent a year ago. At the same time, 90 percent of the Chinese,  86 percent of Vietnamese and 74 percent Indians think economic conditions are good in 2015. Currently,  39 percent of Indians say it is a good time to find a job in their area, up from 29 percent in 2013.

As for the outlook for the next twelve months, 32 percent of the respondents expect the economy to improve a lot, compared with 17 percent last year.  The sharp sentiment boost in India is in line with the border trend seen across most developing and emerging economies.

This optimistic attitude of the people can be expected due to:

● FALLING OIL PRICES

The country is seeing robust economic growth, thanks to a decline in oil and commodity prices and rising consumer demand. The 7.5 percent economic growth forecast for India by the WorldBank would make it the world’s fastest growing major economy- a symbolic change from 2012 when many experts lamented India’s slower growth relative to China.

● MODI EFFECT

Narendra Modi’s emphasis on the pro-market policies and private sector development has strongly resonated with a population frustrated with the obstructive effects of endemic corruption and irksome  government regulations.

But the challenges for India continue…

Living standards among the country’s 1.27 billion residents are far from homogeneous. Millions have seen little benefit from the country’s recent growth, and poverty remains widespread. Close to one-fourth of Indians overall say they’ve lacked enough money for food (27%) or shelter (22%) for themselves or their families in the past year.

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Iran and six major world powers reached a nuclear deal, capping more than a decade of negotiations  with an agreement that could transform the Middle East, and one that Israel called a “historic surrender “.

WHAT IS GOING TO HAPPEN ?

Under the deal, sanctions imposed by the US,EU and United Nations would be lifted in return for Iran agreement to long term curbs on a nuclear programme that the West has suspected was aimed at creating a nuclear bomb.

The accord will keep Iran from producing enough material for a nuclear weapon for atleast 10 years and impose new provisions for inspections of Iranian facilities including military sites. The accord will be a political agreement, not a legally binding treaty. Iran has accepted a “snapback ” mechanism under some sanctions could be reinstated in 65 days if it violated the deal. A UN weapons embargo world remain in place for 5 years and a ban on buying missile technology would remain for 8 years. Under the deal, Tehran would have a right to challenge the UN request and an arbitration board composed  of Iran and the six world powers that negotiated with it would have to decide on the issue.

The International Energy Agency  (IAEA) also wants the access to complete its long stymied investigation of the past weapons worked by Iran. According to the US, Iranian cooperation is needed for all economic sanctions to be lifted.

WHAT IT MEANS FOR IRAN ?

● Analysts say Iran could have a huge influx of cash after a nuclear deal is struck. Potential investors are queuing at the gates, waiting for sanctions to be lifted so that they can team up with local partners to build Iran’s infrastructure.

● All this economic activity, if it generates jobs and stabilises prices, will help Rouhani to justify his drive to end Iran’s international isolation.

● Car and aerospace firms have also approached Iranian companies about potential  deals, with French and German firms leading the way.

* Iran’s GDP had shrunk by upto 20% because of the sanctions. The Islamic Republic had lost more than $160 billion in oil revenue since 2012.

THE INDIAN VIEW

●Impact on oil prices:  Excessive supply of oil is positive  news of oil importers like India. Lower crude price will bring down imports and the government’s subsidy bill . Every dollar drop in oil prices cuts government’s subsidy burden by $1 billion (Rs 6300 crore).

● Good news for India Inc: The deal comes as a huge relief for India refineries and oil rig service providers. Analysts say increased imports from Iran are likely to cut crude import costs, lower shipping and insurance costs.

● More oil : Easing of relations will enable India to import additional oil from Iran. New Delhi was among the largest buyers of oil from Iran even when the sanctions  were in place. Delhi also wants to import natural gas from Iran. 

●Access to Afghanistan: Iran is central to india’s plan for physical access to Central Asia and beyond. The point was driven home several times by PM Narendra Modi during his just concluded visit to Russia and the region. During the meeting  between Iranian president Rouhani and Modi in Ufa recently, the two leaders had discussed the key issue of comnectivity via Iran,  including the India-funded Chabar port. The two sides are working on commercial contract for Chabar port after concluding an MoU on port expansion.

●Better comnectivity:Rouhani and Modi also explored road and rail connectivity to connect Chabar port with the road that India has built in Afghanistan. The lifting of sanctions against Iran will enable Indian firms to participate in the road and rail projects. The Kazakh-Turkmen-Iran rail link can be connected  with Chabhar port. New Delhi is keen to operationalise the International North South Transportation Corridor via Iran to connect Central Asia in a smooth fashion too. India expects Chabhar port,which will give sea land access to Afghanistan bypassing Pakistan, to be operational by December 2016. Access to Afghanistan’s Garland Highway can be made from Chabhar port . This will give road access to four major cities of Afghanistan- Herat, Kandhar, Kabul and Mazar-e-Sharif- critical for safeguarding Indian interests in the landlocked country.

Thus after the deal the oil prices have tumbled by more than $1 and that would see an easing of sanctions  against Tehran and a gradual increase in its oil exports. Analysts  say it will take Iran many month to full ramp up its export capacity following any easing of sanctions. But even a modest initial increase would be enough to pull international oil prices further down as the market is already  producing around 2.5 million barrels per day, above demand.

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A new luxury tax was adopted by Congress in 1990 on items such as private airplanes, yachts, furs, expensive cars and jewellery. This tax was imposed so as to raise revenue from those who could most easily afford to pay. Because only the rich could afford to buy such extravagances, taxing the luxuries seemed a logical way of taxing the rich.

This is a good way of taxing the rich, right ? Even you might be thinking that and well done congress, you did a good work!  Every  layman or people without the knowledge of economics would also think that way. But what’s actually shocking is..this isn’t true. How ? Why ? You will find your answer soon.

Just scroll down and read the entire article. 🙂

Yet when the forces of supply and demand  took over, the outcome was quite different  from what was intended  by this new tax policy.

Consider for example, the market for yachts. Their demand is quite elastic. A millionaire can easily not buy a yacht and can use the same money to buy the other extravagances. By contrast, supply of yachts is relatively  inelastic, atleast in short run. The yacht factory cannot  easily shut down or can be convert  to other alternative  uses and workers who provide their labour  for building yachts will not be eager to change  their careers in response to changing  market conditions.

The burden of this tax would fall largely on the suppliers due to inelastic supply  and elastic demand. That is , this tax on yachts places a larger burden on the firms and workers who build  the yachts because  they end up getting a lower price for their product. However, the workers are not wealthy.  Thus the burden of the tax falls largely on the middle class than on the rich.

Why does this happen ?

You might be wondering what elasticity has to do with the tax burden.

The answer  lies here

When a good is taxed ,buyers  and sellers of the good share the burden of the tax. But how exactly is this burden divided? Only rarely will it be shared equally. The incidence of the tax falls more heavily on the side of the market which is less elastic.  This is because, elasticity measures the willingness of the buyers or sellers to leave  the market when conditions become unfavourable. A small elasticity of demand means that buyers do not have good alternatives to consuming  a particular product whereas a small elasticity of supply means that suppliers don’t have good alternatives to producing  that product . Thus when a good is taxed,the side of the market which is less willing to leave the market because it has fewer alternatives has to bear more of the burden of the tax.

Thus unknowingly this luxury tax imposed was repealed in 1993 by Congress when the actual effects of the tax became apparent to them.

Hope you have got your answer now! 😛

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