Kamal Ghorui
Rising oil prices are a challenge for economy, but sliding consumer sentiment can be a risk
On Feb 27, a day before Iran war started, Sensex closed at 81,287. Yesterday, it fell to 77,566, a drop of about 4.5%. It’s not the worst drop of this war. Kospi’s down almost 16% in the same time, including a 6% drop yesterday. Nikkei has also fallen 10.5% overall – 5.2% yesterday. All markets are on edge because Strait of Hormuz is closed. Goods for sale can’t go in, and oil and gas can’t come out. But specifics vary. In Korea, for example, unavailability of Qatari helium, which is needed for making memory chips, has spooked investors.
Indian markets have weathered the storm well, relatively. But that could change if war drags on for a few more weeks. First up, rising energy costs will affect everything from transport to manufacturing. Then, if RBI hikes rates to contain inflation, investment and consumer demand will slow down. So, foreign investors will be keenly watching India amid this uncertainty. Should they panic, markets might fall sharply, leaving ordinary domestic investors – those who have seen indices rise SIP by SIP – feeling poorer. And that would be bad for growth.
While India’s economy has many pillars, private consumption expenditure – covering everything from pens to shirts, cars, school fees and travel – is the stoutest. This year, it’s expected to make up 61.5% of GDP – its highest share in 15 years. Three things made this surge possible – income tax rebates, GST cuts, and slowing inflation. All of these together left consumers feeling richer. I-T rebate put more money in their hands, GST cuts made things cheaper, and low inflation – 2.7% in Jan – removed an invisible tax. But if inflation shoots up in a few weeks due to sustained high energy prices, that invisible tax will start biting again. And if markets tank at the same time, the psychological effect of seeing their portfolios shrink will make consumers tight-fisted. It happens everywhere and is known as ‘wealth effect’.
There’s little India can do to shorten this war, beyond advising restraint to both sides. But keeping up sentiment within the country is doable and necessary. To ensure that people don’t slip into a crisis mood, shortages and price hikes must be avoided. Banks collapse not because they don’t have funds, but because panic leads to a run. It’s the same with sentiment – so don’t let panic set in. That requires proactive, not reactive, messaging. India’s fundamentals are strong, Iran war will end, and oil and gas supplies resume. We just have to keep the faith.
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