India is reaping the rewards of cheap oil

India will outstrip China in economic growth this year, according to a new IMF report, due to a recipe of policy reforms, an increase in investment, and lower oil prices.

Low oil prices may not be good for energy producers, but they are good for just about everyone else, including entire national and regional economies. Yet a new report by the International Monetary Fund (IMF) says emerging economies are still experiencing weak growth – with the exception of India.

In fact, the IMF’s World Economic Outlook (WEO) for 2015, issued April 14, says that India will outstrip China in economic growth this year, due to a recipe of policy reforms, an increase in investment and lower oil prices. (Related: Rig Count Data Shows Gulf States Cranking Up Pressure On The U.S.)

The WEO forecast said India’s growth will increase from 7.2 percent in 2014 to 7.5 percent this year, then level off for at least a year at a 7.5 percent growth rate in 2016. The report said China’s growth, meanwhile, is likely to fall from 7.4 percent in 2014 to 6.8 percent this year and 6.3 percent in 2016.

The price of oil is a major factor in India’s growth, the IMF document said: It not only leaves money in consumers’ pockets for spending on other goods or for saving, it also tempers the country’s overall inflation rate, which ordinarily tends to rise and even spike during periods of growth.

For emerging countries in general, the IMF suggested structural reforms that include clearing impediments to the infrastructure of their power sector, improving conditions for labor and education and streamlining their product markets to improve both productivity and their competitive edge. (Related: The Real History Of Fracking)

This has already begun to happen in India since Narendra Modi became prime minister last May, the WEO said. “In India, the post-election recovery of confidence and lower oil prices offer an opportunity to pursue such structural reforms,” it concluded. The drop in oil prices began in late June 2014, a month after Modi took office.

India, though, is more of an exception than an exemplar of growth in emerging market economies. In other such states, weak banks and large debt are holding back growth.

 

“A number of complex forces are shaping the prospects around the world,” said Olivier Blanchard, the IMF’s chief economist. “Legacies of both the financial and the euro area crises – weak banks, and high levels of public, corporate and household debt – are still weighing on spending and growth in some countries. Low growth in turn makes [paying off debt] a slow process.”

This applies to India’s fellow emerging market economies such as Brazil, Mexico and Russia. The WEO dramatically reduced its forecast for economic growth in 2015 for all three, attributing their troubles to non-transparent political activity, unstable currency exchange rates and weak prices for their leading commodities. In all three cases, oil is a leading commodity. (Related: The Fatal Flaw In The Climate Change Debate)

Despite this grim news, the IMF forecasts economic growth globally this year at 3.5 percent, and 3.8 percent in 2016. This is due in part to 1.6 percent growth in the Eurozone because the European Central Bank plans to buy bonds issued by governments in the region to stimulate growth. Further, the WEO said, the US economy is expected to grow by 3.1 percent in both 2015 and 2016.

But the report added that these economies must take a large role in contributing to growth outside their borders. It concluded that this would be easier if both interest rates and oil prices were lower.

By Andy Tully Of Oilprice.com

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