"To Bring Down Oil Prices India Must Build Strategic Reserves With OPEC Alliances"
-Dr Atul Deshmukh,Senior Urban Economist, Ministry of Housing, Kingdom of Bahrain
"India must focus at generating income for the masses and diverting resources towards a wholesome development"

Intro: This time on Socio-economic Voices we have Dr Atul Deshmukh, Senior Urban Economist, Ministry of Housing, Kingdom of Bahrain who is keeping a close watch at his parent nation India’s economic activities. So what does he observe and analyse, sitting in far away land? According to him, how must India walk ahead to stay least-affected by the global economic meltdown? This and more in an exclusive interview to Senior Journalist Mahima Sharma only at Indiastat. He asserts that though elevated repo rates by the RBI and skillful communications towards economic reforms would improve the deteriorating currency volatility and also bring down inflation. But he adds that doing this alone isn’t enough. He warns that India thirsts for water reforms more than anything else if food security must be ensured for all. Thus, what immediate reforms does he suggest towards this and more? Take a read...

MS: Rising inflation, sinking rupees vs USD and global economic slowdown. How must India stride ahead and unburden the masses especially the poor ones, who are bearing the brunt of it all? Suggest stringent and immediate measures please.

AD: At the first instance we need to understand what’s inflation? Other than the typical definition that states inflation is a general rise in the price levels those are monitored by an index (current year price/base year price *100) called the ‘Consumer Price Index’ (CPI), what makes these prices change is a very important factor to analyse. Prices generally undergo alterations due to demand-supply dynamics. Higher demand than supply leads to increase in price levels whereas the other way round scenario results in a decline in prices. It’s very simplistic when we are dealing with domestic production, demand and prices. As we go international this scenario becomes very complex wherein the medium of exchange is a reserve currency expressed as USD. In cases of international trade, the appreciation or depreciation of USD has a bearing on prices apart from the above scissors of demand and supply.

The expansion of balance sheets prior to quantitative tightening with the advent of the sub-prime crisis of 2008-09 and targeting the rate of inflation in the US at around 2% resulted in an increased supply of money and lower cost of borrowings. With supply-side remaining constrained, price levels in advanced economies elevated like never before in the last 40-50 years.

India and other emerging sovereigns need a very pragmatic and cautious approach with respect to high inflation in advanced economies as tightening of economic conditions has resulted in an investment flight towards the developed sovereigns. This had weakened the rupee considerably and led to imported inflation in India since July 2022. There is little India can do to restrict imported inflation that has been caused due to a very vulnerable global macro-condition. To restrict capital outflows and depreciation to a greater extent, elevated interest rates by RBI and skillful communications by Government and Monetary agencies especially on the agenda for reforms would enhance sentiments and improve the deteriorating currency volatility.

Elevated interest rates by the Indian Monetary Authority (RBI) would hold back capital outflows as returns on domestic investments would not be negatively affected to a larger extent. High interest rates generally act as a dampener towards capital going out of India. On the other hand, effective communication in the form of macro-economic condition/s & steps to be taken towards mitigating risks from the Government & Central Bank in India would lend valuable insights for investors, traders, rating agencies, hedge funds & the business community at large to make efficient decisions. Pragmatic macro-economic decision-making would surely help plateau inflation.

To ensure the poor and marginalised are off the unprecedented shocks of inflation, direct payouts in bank accounts would reduce leakages and be the most effective monetary relief.

MS: Regulatory reforms including the RBI revising the repo rates, income inequalities and rising job losses. How will the masses find the respite? What kind of intermittent policy change is required?

AD: India introduced the very much required monetary policy reforms through the RBI during the time frame 2013-2015/6. The establishment of a monetary policy committee, introducing a mandatory inflation targeting that was set between four to six percent and very effective communication of the macro-trends in the economy were the glimpses of changes that were introduced.

To bring the Indian macroeconomic scenario in a perspective, RBI resorted to high policy rates during 2014-16 and at the same time achieved higher economic growth while low policy rates during 2017-2018 fetched lower economic growth suggesting the limitations of sticking to monetary agencies alone for economic progress. It’s imperative henceforth to attain an equilibrium between the rate of interest and output in the economy.

The current economic condition wherein Stagflation (low growth & high inflation) is somewhat anchored, in my opinion demands a higher interest rate (RBI had already announced a 50 basis points increase) accompanied by an uptick in government spending to allow crowding in effect. A crowding in scenario is a policy measure wherein the public sector invests resources to induce or instigate private investment to follow suit. In general, the masses would benefit due to lesser erosion of value of savings on one hand & business sentiments on the other as public investments continue to rise.

The preventive or precautionary mechanism to avoid inflation or stagflationary bouts in the long-run is to follow the IS – LM model. An IS-LM model or the general theory of employment, interest and money published by John Maynard Keynes during 1936 is a masterpiece that is not worth ignoring by policy makers/analysts. Herein the real output in the economy for that fiscal year is in equilibrium with the interest rates to avoid either business conditions getting heated up (inflationary) or subdued (deflationary). This measure is to make the output of goods & services interact with the financial markets to attain macroeconomic balance.

MS: You recently stated that investments in development rather than growth will be helpful to revive the economy. Could you please share this vision?

AD: There exist two main divergent opinions that articulate their vision towards economic prosperity.

  1. The first point of view states that economic policies need to be tuned towards generating income that eventually would be shared among the population so that an educated, cultured and healthy society is evolved.
  2. On the other hand, the second response towards well-being is to invest limited economic and financial resources in sectors such as education and healthcare.

There exist examples that derived successes within the Scandinavian countries like Sweden, Finland and Norway who adopted policies towards development away from growth. Today these sovereigns rank in the top 10 among Human Development Index (HDI)

Why should development precede growth? I believe the global community is living in a complex world of numerous growth opportunities and at the same time tackling existential threats like global warming that would change the course of how communities would live life in the future. Mankind today is required to deal with numerous adversities with the advent of population growth and socio-cultural alterations in the societies, to name a few, gender disparities, income inequality, mal-nutrition and under-nourishment, adverse work-life balance affecting physical and mental health, pollution, unavailability of basic necessities like potable water and so on….. The resultant outcome of these adversities is low productivity and subsequently very limited income. Low per-capita income among the masses of population results in below minimum standard of living and prevalence of high relative poverty among citizens. Normally, the sitting government/s tend to overcome the situation by resorting to more and more funds borrowed (towards social distribution) from the market or enlargement in the central bank balance sheets, eventually increasing fiscal deficits and associated macro-economic problems like inflation, debts, fluctuating bond market yields and so on….

To nip the problem in the bud and treat the cause rather than the problem itself, it's advantageous to divert resources towards development (education, healthcare and environment) that bear tremendous positive externalities and lessened the requirement of spending additional resources later towards redistribution of wealth and income.

MS: Oil and gas prices dynamics. The vast divide, the vast differences between their prices in various nations. Considering there is no uniform tax on the same, what kind of an economic policy be framed, amid the falling prices in procuring but rising prices in selling to the masses?

AD: The Organisation of Petroleum Exporting Countries (OPEC) is basically an economic cartel whose member countries regularly meet to decide the share of crude oil extraction and export quotas wherein international prices are set. The prices are set mainly considering the global demand for crude oil and petroleum products. Moreover, it is very critical to know and understand the reserve capacity of oil and gas a country possesses rather than the actual production and sales alone. As per world-o-metres 2016 data, for instance, Venezuela, Saudi Arabia and Canada possess the highest crude oil holding capacity (around 44%) in the world while on the other hand, Russia is Numero Uno when it comes to global gas reserves and control around a quarter percent of the global capacity. Having said that, the United States possesses the fourth largest gas reserves in the world and the oil production almost at par with Saudi Arabia but being the largest economy, its consumption leaves hardly any amount for exports providing OPEC an upper hand to dominate international prices.

Dealing with the second part of the question, although the procurement prices of petroleum products internationally remain similar, prices vary among nations due to three main factors namely proximity, mode of payment, downstream capacity and investment in strategic reserves.

  1. Proximity to the country of origin of the crude wherein transport costs play a critical role.
  2. Currency of Payment is another critical factor as US $ payments may turn out to be expensive if appreciation happens. If the term of payment is such that the importing country pays in the local currency, imports become much more affordable.
  3. The refining capacity (downstream capacity) of the importing country is limited, the final product sold in the market (at pumps or electricity generators) is ought to be expensive.
  4. Investments in Strategic Reserves would certainly make procurement highly cost-effective.

Coming to the third part of the question, with respect to variance of procurement and selling prices of crude and petroleum products in India, around 85% of petroleum requirement in India is import oriented. Oil and petroleum products being the prerequisite that run the economy in an optimum possible manner, it would not be incorrect to say that India depends on foreign countries to run its economy.

The high cost of petroleum products in importing countries like India is a result of a twin impact:

  1. The premium sell of crude per barrel (say around USD 100) while the extraction cost is hardly three to four USD for OPEC countries
  2. And secondly on account of distorted indirect taxes in the form of excise and customs duties with the Central Government and sales tax with the respective State Governments.

Since India had embarked on Goods and Service Tax during July 2017, the option would be to include petroleum products in the ambit of GST. Other path breaking reform that could be implemented is building strategic reserves with OPEC alliances. Such initiatives had already been initiated with the UAE and Saudi Arabia. We need to know any developments on such initiatives.

MS: Amid the global economic meltdown, drastic climate change is also posing a severe threat towards global food crisis. How must India plan to keep food resources balanced especially for the poor?

AD: The global food scenario was never looking optimistic even prior to catastrophic instances, namely the military conflict wherein the sovereigns involved generate around 20% of the global food supply, climate change and the increasing global population accompanied by a reduction in arable land. As per the World Population Review, India and the United States are the two prominent nations that possess the most cultivable land in the world.

Coming straight to the point, although India is a custodian of a very large proportion of cultivable land, higher population size and over and above dependence on rainwater makes the scenario bleak unless path breaking reforms are not initiated in the water sector. In my opinion, India thirsts for water reforms more than anything else if food security must be ensured. Currently water as a resource in India (both urban and rural) is looked at as a necessity and time is ripe to consider rethinking the same as a commodity. A commodity and infrastructure status to water resources would make decision makers monitor demand, supply and access availability by generating huge data sets on water resources. Water policy, although had been initiated, intense discussions and analysis is the missing link. Lot of states in India as of now are under disputes with respect to distribution of water.

Moving the focus of the discussion to agriculture and food security, currently as per Centre for Monitoring Indian Economy (CMIE), agricultural employment has gone up to 38% of households in 2019-20 compared to 35.3% during 2017-18. In other words, mechanisation of agricultural produce is falling short to release communities away from agriculture towards other sectors of the economy wherein they can generate high income. Secondly, soil experts are of the opinion that crop yields need to be altered to restore its cultivability. Unfortunately, farmers in India concentrate on growing the same crop pattern each year risking arable land. Marginal ownership of agriculture lands in India loses its scale economy and further restricts income. Restoring Agriculture Produce Marketing Committee (APMC) and initiating reforms in the distribution of agricultural produce from the field to the market would eliminate middle-men commissions, restore quality of produce, and ultimately fetch a reasonably good price for the farmer improving incomes.

There exist many other suggestions and this write-up may not be able to encompass all of them. Thus, I have shared the major ones till we hold a detailed discussion in future to throw more light on the same.

MS: We recently read about your vision on ‘Opportunity Cost as an effective tool towards policy-oriented decisions.’ Can you please explain the same in easier words for the understanding of masses as well as our student readers?

AD: In our daily lives we all living organisms need to make choice-based decisions, mostly that possess alternative solutions. Example, a student would have a spare time of three hours, requiring him to opt between watching a movie or going for a brisk walk in the evening; a homemaker choosing between helping the young ones in their studies or managing the house-hold chores. Going further, animals are often required to decide on make-or-break life decisions between staying back and relaxing in the field or continuing the journey further in search of a house to protect themselves and the newly born against predators.

Having said that, the foregone choices we leave behind bear a cost to be paid (monetary or in kind), precisely called the ‘Opportunity Cost’. To explain further in economic terms, opportunity cost is the foregone choice with an aim towards achieving a specific policy goal or agenda. Furthermore, mathematically / quantitatively, it’s the difference between the implemented alternative and the sacrificed alternative. Examples below may help the reader throw light on this such a powerful tool towards decision making:-

An investor possesses USD 100,000 to be invested either in the purchase of a land parcel or invest in the manufacturing of wooden furniture. The best way to deal with opportunity cost is to calculate the Rate of Return (ROR). Assessment of the ROR is carried out as the mathematical ratio of the future value of the investment to the present value of the investment. Economic decision-making involves a choice of alternatives (a simple example: - A two-hour free time should be used reading a book or watching a movie). ‘Opportunity Cost’ is the foregone benefit for not opting / sacrificing alternative sources of investment. It involves a mechanism to deal with economic choices, difficult to make in the most optimum manner. For instance, investors need to choose between parking funds in manufacturing car tires or construction of a bridge. A farmer would be required to deal with an alternative whether growing grapes would be profitable or mangoes, given an acre of agricultural land that he owns. So, how opportunity cost is calculated on what’s the rationale behind this exercise? Let’s take alook…

If growing mangoes & grapes would fetch an equivalent return on investment, say 10%. To add to the information, if the investor is provided with the data that grapes would require additional 100 gallons of water than mangoes, then the opportunity cost of producing grapes would be the cost of 100 gallons of additional water that may be saved for other purposes with growing mangoes. Hope this helps our readers understand the economics in a better way and if they are planning a startup per say, then this detail would be very helpful in analysing future costs.

MS: At one point you have listed that India needs economic experts to formulate policies to implement second generation reforms. Can you share this vision and expertise?

AD: The 1991 liberalisation moment opened India for international trade and commerce. Strict control of the Government over the economic and financial instruments were replaced by private sector participation. Foreign investments inflow (foreign direct as well as institutional equity) improved and India’s forex position turned positive with a Balance of Payment (BoP) crisis averted. Furthermore, massive industrial progress was achieved by the Indian economy with the establishment and development of small-scale and heavy manufacturing and service industries.

Surging ahead, second-generation reforms are quite critical that would place the Indian economy among the high growth pedicel towards a condition of peaking. To achieve this objective, other than administrative positions (Indian Administrative/Economic Services) within the Government sector, sector specialist/s or expert/s would provide an unparalleled judgement about forecasting the economic trends and providing path-breaking analysis in the form of equilibrium analysis that would unfold future course of investments. Critical analysis of sector specific and aggregate economic equilibrium would go a long way in accessing the approximate investment requirements in the economy, probably addressing over-heating or under-capacities that usually result in either recessions or stubborn inflation. Sound economic analysis enables foresee global catastrophic conditions and their impact on the Indian economy to assist efficient decision-making. Last but not the least, supreme economic expertise would make sure the establishment of sector-wise regulatory agencies, a very much required mechanism to control prices, induce competition and help towards avoiding monopolies and oligopolistic markets.

MS: Gender inequality, sparse inclusivity and economic development. What’s your advice to the reformists of India, how must they stride ahead by balancing this stark weakness in the system?

AD: In my point of view, India is currently undergoing an utmost phase of transition on the ‘Rostow’s Model of Economic Development’. The stages of development are mentioned as under: -

  1. Traditional Society
  2. Pre-conditions to Take-off
  3. Take-off
  4. Peak growth
  5. High Mass Consumption

Although India has achieved elevated levels of economic growth, attaining sustainability is an objective yet to be achieved and extremely important to transform into a developed sovereign nation.

As the society transforms economically, the need for path-breaking reforms gets critical. I opine, the Indian Government should embark on a journey to formulate policies towards establishing efficient regulatory mechanisms.

– Sector-specific regulation would clearly be able to access the current ongoing economic scenario and the need for future investments. Effective regulation curtails market distortions like monopolistic and cartel markets and restores price stability.

– Competition among the business entities would improve investments and ultimately job opportunities for citizens. Reduction in unemployment rate would drive inclusive development, reduce income inequalities, and help better human development indicators like gender inequality.

MS: India's surge of FTAs (Free Trade Agreements) is an interesting aspect. Can you share the advantages that the country will have with a vision for global economics, in simple words for our experts and student readers?

AD: Currently India has FTAs with Sri-Lanka, South Asian Free Trade Area (SAFTA) that include Sri-lanka, Pakistan, Nepal, Bhutan, Maldives and Afghanistan. India also has signed a special treaty with Nepal and Bhutan. Off-late an interim FTA has also been signed with Australia and a full agreement with UAE. Discussions and dialogues are on-going with the European Union (EU) and the UK. I personally believe India needs to negotiate each and every FTA wherein the functioning of the economy would be possible based on a low-cost base. To illustrate an example, in the case of Australia or UAE, India should negotiate low import tariffs that ensure energy security (coal for Australia and oil for UAE). In bargain India may consider a calibrated opening of its markets for say, dairy products from Australia and consumer durables from UAE.

When it comes to international trade, the basic principle that needs to be addressed is to acquire commodities and services that are not possible to produce within the country. Alternatively, they could only be produced at a high opportunity cost. Here comes the ‘Ricardian Model of Comparative Advantage'. On an international basis, I opine a full-fledged multilateral trade body like World Trade Organisation (WTO) that is fully operational and regularly reformed to minimise dispute settlement costs and the likelihood formation of regional bodies. At this critical juncture the world needs unionism and togetherness rather than a half-hearted approach to trade. The theory of comparative advantage would be best performing under a multilateral mechanism rather than regionalism. There exists a dual aspect to this concept, first, what the theory of comparative advantage means & secondly how it would work the best under multilateral mechanism.

We just discussed the concept of ‘Opportunity Cost’, so the Theory of Comparative Advantage is just an extension of the opportunity cost at an international stage. It states that the two or more nations that trade among themselves, every country should produce a commodity that incur the lowest opportunity cost. This enables sovereigns to work at a low-cost base with ample amount of savings at disposal.

Coming to the second aspect of the question, I infer that comparative advantage theory works the best among multilateral systems rather than regional trade systems, the reasons are obvious. Since almost every trading country in the world would be a part of a multilateral system, a wider spectrum to choose for the lowest opportunity cost nation. Example: - A global mango pulp manufacturing unit under regionalism situated in UAE who is on the lookout for mangoes would be restricted only to MENA region as a part of regional pact but under a multilateral mechanism have an opportunity to trade for best mangoes outside the MENA periphery at a lowest cost.

MS: What’s your take on the recently held FTA between India and UAE? Its impact, benefits in the future and more?

AD: The FTA between India and UAE would help generate a business of USD 100 billion from the earlier USD 60 billion. The agreement says a lot about cooperation and reduction in tariffs pertaining to products such as petroleum, textiles, agriculture, jewellery, metals, etc. Pharmaceutical products and trade in services like education, business, telecommunication and construction would get a boost. The FTA would bring India with job generation especially among the Small and Medium Enterprises (SMEs) that have taken a hard beating during the pandemic. Trade in services especially (infrastructure) would generate much required investments to assist growth. However, I would have been happier if a discussion or MOU was initiated towards the future possible strategic crude oil reserve in India by ADNOC, UAE.

The FTA is the best platform to initiate the investment and take it ahead towards feasibility study.

About Dr Atul Deshmukh

Since 2008, Dr Atul Deshmukh has worked with the Ministry of Housing, Kingdom of Bahrain as a Senior Urban Economist. His work profile is to formulate housing policies for the Government of the Kingdom of Bahrain. Dr. Deshmukh was a member of the technical working committee under the Ministry of Housing and UN Habitat towards Housing Policy 2018. In the year 2012, he was awarded for policy work by the Government of Bahrain.

The prominent economic ingredients that Dr Deshmukh works on, involve the following techniques/tools for analysis purposes: -

  1. Housing Equilibrium for Bahrain Housing Sector
  2. Pareto Optimality Condition and Production Possibility Frontier analysis
  3. Estimating Gini Coefficient (tool to analyse income inequality)
  4. Estimating Demand (regression analysis) for housing services
  5. Little’s Law Analysis, Waiting time for house delivery
  6. Estimating the Median Multiple (house affordability) in Bahrain Vs other countries
  7. Population studies and Pyramid analysis
  8. Innovation towards the Financial Model (Public-Private Partnership) for Housing Sector in Bahrain
  9. Standard Deviation and Data Envelopment Analysis (DEA) of Quantitative Data

About the Interviewer

Mahima Sharma is a Senior Journalist based in Delhi NCR. She has been in the field of TV, Print & Online Journalism since 2005 and previously an additional three years in the allied media. In her span of work she has been associated with CNN-News18, ANI - Asian News International (A collaboration with Reuters), Voice of India, Hindustan Times and various other top media brands of their times. In recent times, she has diversified her work as a Digital Media Marketing Consultant & Content Strategist as well. Since March 2022, she is also an Entrepreneurship Education Mentor at Women Will - An Entrepreneurship Program by Google in Collaboration with SHEROES. Mahima can be reached at

Disclaimer : The opinions expressed within this interview are the personal opinions of the interviewed protagonist. The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.

indiastat.comAugust, 2022
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Dr. S P Sharma Chief Economist, PHDCCI

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