The 2008 world economy is forecasted to g

New Delhi, 23 Jul 2008. Prime Minister Manmohan Singh has won the No Confidence vote. Despite
the sully of vote buying allegations, being able to push through the US-India Nuclear Deal is a
milestone. row at the rate of 4.8%

Indian Economy: Why Risk Losing Office over

a Nuclear Deal?

New Delhi, 21 July 2008. Both the Congress Party and the opposition BJP are
waged in a frantic attempt to lure minority parties and rebels to their side of the
fence as the clock ticks down to a No Confidence vote in Indian parliament
scheduled for Tuesday 22 July 2008.

Prime Minister Manmohan Singh has been determined to push through the
nuclear energy deal he has engineered with US President George Bush. As a
result, the left-leaning parties that made up his fragile coalition have deserted
him.

If you want your son to get a plum job or would like to see a pet policy enacted,
then there has never been a better time to strike a deal. The vote is expected
to be razor-thin, and marathon negotiation sessions are going on day and night
in the run up to the vote. Smaller parties are being courted by both Congress
and the BJP in an attempt to secure their support. Over the weekend, for
example, the JMM announced that two of its five MPs would be given cabinet
positions and a post in state government would be secured for, you guessed it,
the leader’s son.

Leaving aside the gritty real politik of Indian parliamentary democracy, as

intriguing as that is, it is worth questioning why Congress believes this deal is
so important. With inflation running at close to 12% tempers are flared on the
ground. The situation is already challenging, why go out even further on a limb?

The answer, as with so many other things in economics and politics, comes
down to oil. India and China have been growing their economies at 9%-12%
per annum for the past few years, with similar increases in their energy
demands. Oil producing countries have not been able to raise production levels
to meet that demand. There is a growing debate as to whether this is a cyclical
phenomenon, which will abate in a few years once new oil wells come online, or
a deeper structural one, in which natural limits to oil production are being
reached. In either scenario, it seems sensible to assume that at least the next
ten years or so will see supply lagging behind demand.

India and China are reacting to the crisis in different ways. China has been
aggressively and single-mindedly tying up energy and commodity supplies on a
global scale. It has become a big investor in regions as far flung as Africa and
Latin America, and often represents a more palatable alternative than
traditional western investors in that it does not weigh things like human rights
in its investments.

India, as the world’s largest democracy, cannot move as quickly to lock in

supply-side deals, and it does not have the latitude to strike major deals with
regimes that the often left-leaning public would have objections to.

Alternative sources of energy therefore need to be secured. More ‘eco-friendly’

sources such as hydro-electric, wind or solar power would certainly be more
politically palatable, but will not be able to scale quickly enough to slake India’s
monstrous energy thirst. With food supplies already a major challenge given
India’s 1.1 billion population, biodiesel is also not a viable option.

Prime Minister Manmohan Singh, an economist and former Finance Minister,

therefore feels he has no choice but to look at nuclear power as the only source
of energy that can scale to meet the supply shortfall that is just getting
underway.

He is not alone. Advances in the safety and disposability of nuclear energy

technologies over the last twenty years have put nuclear power back on the
map for many countries worldwide. Ironically environmental activists who were
once the biggest its biggest critics are increasingly seeing nuclear as a clean
alternative to fossil fuels.

Even the BJP believes that nuclear cooperation with the US, but believes the
current deal is too favorable to the Americans and would like to re-negotiate.
With US Presidential elections due this November, and India required to hold an
election by May 2009 at the latest, however, it is doubtful that a new deal can
be constructed any time soon.

Dr Singh is convinced that this deal is vital to the long-term interests of India
and he is therefore willing, as is his party, to stake everything on getting it
through.

Santos de la Raya, EconomyWatch.com

Current World Economic Overview

Global growth appears to have improved in the third quarter (Q3) of 2005. The firming up of
global economic activity during the third quarter of 2005 and its broadening ambit suggests
that the global growth could reach a level higher than the average for the period 1990-2004. For
2006, the International Monetary Fund (IMF) has projected world growth at 4.3 per cent with
advanced economies growing by 2.7 per cent and emerging market and other developing economies
growing by 6.1 per cent.

Growth Rate Of Real GDP

In the US, real GDP rose by 3.7 per cent in Q3 on a year-on-year basis on the strength of business
spending, with consumer confidence regaining much of the ground lost after the August hurricanes.
The merchandise trade deficit has improved to US $ 64.2 billion in November. The US current
account deficit narrowed in the third quarter to 6.2 per cent of GDP. The easy financing of the
current account deficit reflected sustained foreign appetite for US assets. In the euro area, a
recovery seems to be setting in with real GDP up by 1.2 to 1.6 percent in 2005. Conditions for
emerging out of deflation steadily improved in Japan with real GDP growth rising to 2.9 per cent in
Q3, driven mainly by domestic demand and supported by a rise in bank lending. Industrial
production also rose by 1.4 per cent in November, increasing for the fourth month in a row,
combined with signs of higher employment. Growth in Q3 remained robust in the developing
countries led by Chinese Economy (9.4 per cent), Hong Kong (8.2 per cent) and India (8.0 per
cent). In Russia and Latin America, too, growth has been buoyant, except for Brazil where real GDP
fell in Q3 by 2.8 per cent. High oil prices, domestic capacity constraints and some building up of
inflationary pressures continue to be seen as factors restraining growth for most developing
countries.

Effects Of Crude Prices In The International Scenario

Due to the moderation in international crude prices since September, consumer price inflation in the
advanced economies has fallen in the fourth quarter of 2005. In the US, consumer prices dipped by
0.1 per cent in December, leaving inflation for 2005 at 3.4 per cent. In the euro area too, inflation
edged down to 2.4 per cent in November from 2.5 per cent in the previous month. Deflation
continued in Japan with overall consumer prices falling by 0.8 per cent in November, the biggest
drop in three years. In major industrial countries, inflation appears to have been contained and
spillovers of oil prices into wage increases have been moderate. By and large, price stability has
been maintained in these countries in the face of the oil shock although asset prices, especially
house prices, remain a cause for concern in terms of potential inflationary pressures and the
repercussions on consumer spending and financial sector balance sheets. On the other hand,
inflation has risen in major emerging market economies. Besides elevated levels of oil prices, tight
non-oil commodity markets have imposed price pressures.

Future spikes in crude oil prices continue to carry the major risk to prospects of global growth and
stability. While demand generally drove oil prices up in 2004, the price increases in 2005 were also
the result of supply disruptions, inadequate investment as well as the reduction in world oil spare
capacity, which fell to its lowest level in over three decades. World oil prices have climbed
throughout 2005 despite somewhat slower demand growth in both China Economy and the US
Economy". Declines in petroleum product prices (especially petrol and diesel) during October-
November due to mild weather in the northern hemisphere and ongoing hurricane recovery efforts
in the US have been followed by some firming up of prices since December due to geopolitical
factors. The average price of the Indian basket of international crude varieties (comprising Brent
and Dubai Fateh) ruled at around US $ 60.0 per barrel in October-January 20, 3.8 per cent lower
than in the preceding quarter but 41.5 per cent higher than a year ago.
The international pass-through of oil prices to domestic retail prices has been varied across
countries. While domestic retail prices (including tax) of petrol in December 2005 increased on a
year-on-year basis by 22.5 per cent (in US dollar terms) in Canada and 16.9 per cent in the US,
they declined by 4.9 per cent in Japan and Italy. Similarly, diesel prices increased by 23.5 per cent
in Canada and 20.5 per cent in the US while they declined by 4.5 per cent in France. Comparatively,
India’s domestic retail prices of petrol and diesel (average of four metros) increased by 14.6 per
cent and 13.0 per cent, respectively, by January, 2006. While international crude prices have risen
by 69.0 per cent between March 2004 and December 2005, domestic prices of petrol and diesel
have increased by 34.0 per cent during this period; price of LPG increased by 16.4 per cent but
there has been no increase in the price of kerosene. Since the tax component in retail prices varies
from country to country, it is more appropriate to compare the position net of the tax
component. The retail prices, net of taxes, of petrol and diesel have increased across the
board in the developed world. While the increase in petrol prices ranged between 32.0 per cent in
Canada, 21.1 per cent in the US and 1.1 per cent in Japan, that of diesel prices was between 29.0
per cent in Canada, 25.9 per cent in the US and 3.3 per cent in France. Prices for crude oil,
petroleum products and natural gas are projected to remain high through 2006 because of
continuing tightness in international supplies and increasing demand. According to the World Bank,
a supply shock that reduces oil deliveries by 2 million barrels per day could push prices up to above
US $ 90 per barrel, reducing global growth by 1.0 per cent and the growth of large low-income
economies by 1.7 per cent.

Global Trade Imbalances Due To Moderate Oil Prices

The financing of the large current account deficit of the US is increasingly becoming a cause for
concern. Government saving has fallen in the US and Japan and household financial saving has
virtually disappeared in countries with housing booms. On the counterpart side, many emerging
markets, particularly in Asia, have run current account surpluses resulting in build-up of
international reserves. The US current account deficit is projected by the OECD to exceed 7.0 per
cent of GDP in 2007 with substantial surpluses elsewhere. Such a configuration could increase the
probability of a disorderly unwinding of macro imbalances and disruptive movements in major
currencies.
Within the mounting global imbalances, oil-exporting countries are currently running large current
account surpluses, repaying debt, as in the case of Russia, and building up assets. Oil exporting
countries have been actively using their export revenue to buy financial assets in various countries.
Thus, the rise in oil prices has represented a sizeable redistribution of income from oil consumers to
oil producers, which could have an impact on global demand and the future course of unwinding of
global imbalances.
Monetary Policy Formulations Over The Globe
The prospect of a faster pace of monetary tightening contributed to a sharp drop in equity prices
around the world in early October. Equity markets rebounded strongly since November, boosted by
signs of still robust growth in the US as well as announcements of mergers, share buybacks and
dividend increases. Japan outperformed most other equity markets throughout this period. Upward
revisions in policy rates had a surprisingly muted impact on the prices of emerging market assets.
Emerging markets benefited from record inflows of foreign portfolio investment in 2005. As
concerns about slowing US growth eased, emerging markets bounced back strongly from their late
October lows. By late November, equity and bond prices had returned to their end-September highs
and had generally reached record levels by early January 2006. Equity markets have, however,
weakened overseas thereafter mainly on account of renewed firmness in global crude oil prices.
Corporate credit default swap rates and bond spreads remained more or less unchanged in October
although they have widened significantly since November. While long-term interest rates rose in
many markets in September and October, they retreated slightly in November, and at the end of
December it was still unclear whether the recent rise in yields would prove as ephemeral as previous
increases. The increase in longer-term yields mainly reflected upward revisions to interest rate
expectations over the near term. Further, the potential for rising energy costs to add to inflationary
pressures was a key focus of investors’ attention. The rise in implied volatility also reflected growing
uncertainty about the economic outlook. During December 27-30, 2005 yields on 10-year US
Treasuries fell briefly below those on two-year notes for the first time since December 2000,
inverting in intra-day trading and signalling expectations that interest rates could fall in future that
is generally associated with weak growth. This inversion came as analysts were finally anticipating
an end to the current tightening cycle and a lower long-term risk premium than in the past. In
January 2006, however, the spread has turned positive again. The US dollar appreciated by 3.5 per
cent in trade-weighted terms during 2005 and a similar trend continued in January 2006. Of the
major central banks, the US Federal Reserve has raised its policy rate by 25 basis points each on
thirteen occasions from 1.0 per cent in June 2004 to 4.25 per cent by December 2005 while recently
providing indications of nearing the end of the cycle of measured rise in the policy rate. The Bank of
England has kept its repo rate unchanged at 4.50 per cent since August 2005 in response to slowing
domestic growth. The European Central Bank (ECB) has raised its policy rate by 25 basis points in
response to rising inflationary expectations, after holding it unchanged at 2.0 per cent since June
2003. Monetary policy has been tightened in several economies in emerging Asia, primarily in
response to higher fuel prices and to the measured pace of policy tightening in the US. Bank
Indonesia raised its policy rate by 50 basis points to 12.75 per cent on December 6, 2005 which was
the tenth successive increase during the year. In Thailand, the 14-day repurchase rate was
increased for the seventh time since January 2005 from 2.00 per cent to 4.25 per cent on January
18, 2006. Monetary authorities in Singapore and Hong Kong raised their policy rates by 187 basis
points and 200 basis points, respectively, during the year up to December. In Malaysia, the policy
rate was hiked to 3.0 per cent in end-November, 2005. In emerging market economies in general,
the direction of policy change has been towards either tightening or withdrawal of the
accommodative stance.