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Falling commodity prices, especially of crude oil, have been instrumental in shoring up India’s macro-economic fundamentals over the past few years.

From $110.82 a barrel in January 2014, crude oil prices collapsed just as the Narendra Modi-led NDA government came to power (Chart 1). This was instrumental in keeping a lid on inflation during two drought years, and also helped contain the current account deficit and shore up government revenues.

This decline in international oil prices led to a fiscal windfall, with an astute government raising taxes and not fully passing on the gains from lower prices to consumers. As a result, while consumer end prices did decline, the extent of the decline was much lower than at the wholesale level, as seen in Chart 2.

This, coupled with range-bound gold prices (Chart 3), led to a sharp fall in two of India’s principal imports, as shown in Chart 4. As a consequence, the country’s current account deficit declined to more manageable levels, as shown in Chart 5 — a far cry from 2013, when India, along with Turkey, Brazil, South Africa, and Indonesia,  earned the moniker of fragile five, owing to weak macro-economic fundamentals.

Prices of other commodities also declined over the same period. As Chart 6 shows, with the exception of zinc, the prices of most other commodities have fallen over the past three-odd years. This, in turn, has helped boost corporate profitability at a time when revenue growth was lacklustre.

A similar trend is observed in agricultural commodities. As Chart 7 shows, while wheat prices have barely budged upwards over the past few years, rice prices have declined. The pain from this decline in prices is evident in the farmers’ anguish, which is unfolding across the country.


Last modified on Monday, 26 June 2017
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