Insulating local economy from global shocks

The latest Commodity Markets Outlook report released by the World Bank paints a gloomy picture of commodity prices remaining at historically high levels for the next three years due to the war in Ukraine. The report also warns of persistent high commodity prices leading to the global economy falling into stagflation which is characterized by high rates of inflation and rising unemployment due to recession. Pressure will be mounting on the Reserve Bank of India (RBI) to raise interest rates in its next Monetary Policy Committee meeting in June to tame inflation and prevent it from breaching the upper tolerance threshold of 6 per cent. The World Bank has stated that the increase in energy prices over the past two years has been the largest since the 1973 oil crisis and price increases for food commodities—of which Russia and Ukraine are large producers—and fertilizers, which rely on natural gas as a production input, have been the largest since 2008. It has sounded the alert that energy prices are expected to rise more than 50 per cent in 2022 before easing in 2023 and 2024. Non-energy prices, including agriculture and metals, are projected to increase almost 20 per cent in 2022 and will also moderate in the following years. "Nevertheless, commodity prices are expected to remain well above the most recent five-year average. In the event of a prolonged war, or additional sanctions on Russia, prices could be even higher and more volatile than currently projected," states a release issued by World Bank while releasing the report. The report titled "Commodity Markets Outlook: The Impact of the War in Ukraine on Commodity Markets, April 2022" brought out by World Bank Group cautions that because of war-related trade and production disruptions, the price of Brent crude oil is expected to average 100 dollars a barrel in 2022, its highest level since 2013 and an increase of more than 40 per cent compared to 2021. Prices are expected to moderate to 92 dollars in 2023 but well above the five-year average of 60 dollars a barrel. This will be a cause of concern for policymakers in India as the country is dependent on imports for more than 85% of its crude oil requirement. Soaring prices of petrol and diesel resulting from a rise in oil import bills and rising internal oil prices have already triggered high food inflation making lives difficult for ordinary citizens. The rupee weakening against the dollar has added to worries of higher import oil bills and high retail prices of petrol and diesel will be inevitable unless the Central Government decides to provide relief to consumers through a cut in central excise duty. There is less room for States like Assam to further reduce Value-Added Tax on petrol and diesel as the state is already losing revenue to the tune of Rs 1000 crore accounting for reducing VAT on petrol and diesel. Besides, the apprehension of drying up of revenue if the Central Government stops paying GST to states is looming large. Assam Government's request to the Central Government for the continuation of GST compensation or to provide a financial package in case it is stopped is a legitimate proposal and needs consideration by the GST Council as revenue resources of the state are limited. While the RBI has allayed apprehension over stagflation in India, it will be difficult for it to ignore the caution by the World Bank of stagflation fear in the global economy. The country's faster transition to renewable energy and domestic crude oil and coal production can reduce its dependence on fossil fuel imports and increase its capacity to absorb global shocks in the energy market and consequent rise in input costs in agriculture. For the ecologically fragile and biodiversity-rich northeast region, increasing focus on harnessing solar, wind, biofuel and small hydro potential is critical to fine balancing the conservation of the environment for climate change mitigation and meeting rising energy demand. The government, as well as private investments in research and development in the renewable energy sector, can help augment the production of non-fossil fuel energy. Lessons learnt during the Baghjan blowout and indiscriminate and illegal coal extraction in the Dehing-Patkai elephant reserve causing permanent loss of patches of most valuable rainforests must not be forgotten while setting targets of fossil fuel-based energy production in the region. States in the northeast region, on the other hand, will have to explore alternative sources of generating revenue for self-reliance and stop being dependent on the Central Government grants. Multiple connectivity projects pushed by the Central Government for trade and commerce in BIMSTEC, BBIN, and ASEAN regions call for states in the region to be ready with the identification of products and services that can be traded once these transborder connectivity projects are commissioned. Increased trade and commerce and tourism with next-door neighbours will insulate the region from global food and energy price shocks.