Cheaper oil will not eliminate structural challenges facing Asia's biggest economies although it presents a huge opportunity for both India and China. Explain.
Published: February 6, 2016
India has all reasons to be pleased as the oil trends will spell a huge improvement in current account deficit, correct the government’s balance sheet and also tame inflation considerably. The government has to maintain a smart balance between cutting and retaining different subsidies for diesel, liquefied petroleum gas, kerosene etc. It has to free space for expenditure on infrastructure, education and healthcare. So the subsidies on fertilisers will have to be rolled back which will need a lot of political capital. Prudent supply-side reforms have also to be fitted in well in the growth story so that the government’s performance in the elections in two major states in India does not take a hit.
Likewise China has to act smart as contrary to India it is facing a slowing economy. The government is trying to plug the gap by speeding the $1.1 trillion infrastructure projects. However, cheaper oil should not serve as an incentive to reduce carbon footprints but a smooth transition to energy-efficient fuels. China has to work on its state-owned enterprises as the Central Bank can now comfortably cut the key interest rates. At the same time, it has to work to boost its private sector which is more productive and efficient. China has worked on building its strategic energy reserves but it will have to work harder to overcome the structural challenges to revamp the economy.
Model Questions Category: 076 - Infrastructure Energy Sector