After the first oil shock of September 1973 when prices quadrupled,
the economy was stung by very high inflation rates of over 20% with
the misery being compounded by a monsoon failure as well. After the
second oil shock of 1979 following the Iranian Revolution that came
along with another monsoon failure, India approached the IMF. After
the third oil shock of August 1990 caused by Saddam Hussain’s invasion
of Kuwait, the Indian economy simply collapsed-by June 1991 foreign
exchange reserves had dwindled to less than a billion dollars and massive
capital flight was on. The IMF stepped in once again but this time,
thankfully, with tough conditions missing in 1979.

The responses to the 1973 and 1979 shocks were fundamentally inward-looking.
By contrast, the response to the third shock was outward-looking. The
results have been obvious. India is weathering the fourth oil shock
smoothly-so far, at least. Foreign exchange reserves are around $ 73
billion. Remittances and IT export earnings are more than compensating
for the excess of imports over exports of merchandise goods and commodities.
The rate of inflation has increased but not alarmingly. Freeing diesel
prices and reducing subsidies for LPG and kerosene has also helped.
The management of the exchange rate has been very effective. In fact,
paying more for oil imports may just be what is needed to enhance demand
for dollars: in recent months, with supply of dollars increasing and
demand for it sluggish, the rupee had appreciated in relation to the
dollar.

What about the recent behaviour of world oil markets? Surprisingly,
they are not turbulent even though the Iraq war has dragged on longer
than expected and even though some key members of the 11-nation Organisation
of the Petroleum Exporting Countries (OPEC) have faced major supply
dislocations. For one thing, demand in the summer months is not as buoyant
as in the winter. More importantly, supplies from non-OPEC countries
like Russia have increased so much so that although it has over 75%
of world reserves, OPEC currently meets just about 31% of global demand.
For strategic reasons—and this shows the overpowering American influence
and power to which we also have to adjust—OPEC members are wary of
using the oil weapon punitively.

OPEC has, for the past three years, been following a price band with
production cuts when prices fall below $ 22 a barrel and production
increases when prices rise beyond $ 28 a barrel. For the most part this
band has held. It was only in January 2003 that the basket averaged
$ 30 a barrel and $ 31.5 a barrel in February 2003. In recent days,
prices have dropped once again to below $ 29 a barrel. With full production
in Venezuela and Nigeria being gradually restored and the return of
Iraq to the OPEC quota system imminent, the prospects for increased
oil supplies have never looked as good as they do now.

Unlike all other countries barring China, India is no longer vulnerable
to external shocks. That is the greatest tribute to the Rao-Manmohan
Singh reforms continued by successive governments thereafter. But it
continues to bleed internally. Unsustainably high fiscal and revenue
deficits are “elbowing out” desirable public investment in agriculture
and infrastructure. Deeply divisive politics is stymieing badly needed
reforms to make the economy domestically more productive and globally
more competitive.