MACRO ECONOMICS

IMPACT OF LIBYA CRISIS ON INDIAN

ECONOMY
SUBMITTED BY
HARSHITA MATHUR
B.COM (H) THIRD YEAR
SECTION- H
ROLL NO- 445
TUT GROUP- H-48
 LIBYA CRISIS

AN INTRODUCTION
• The 2011 Libyan civil war is an ongoing armed conflict in the 
North African state of Libya being fought between those seeking to
depose Muammar Gaddafi and hold democratic elections, and pro-
Gaddafi forces.
• The situation began as a series of peaceful protests which Gaddafi's
security services attempted to repress, beginning on 15 February
2011. Within a week, this uprising had spread across the country
and Gaddafi was struggling to retain control.Gaddafi responded
with military force and other such measures as censorship and
blocking of communications.
• The situation then escalated into armed conflict, with rebels
establishing a coalition named the Transitional National Council
based in Benghazi. The International Criminal Court warned
Gaddafi that he and members of his government may have
committed crimes against humanity.
• The United Nations Security Council passed an initial resolution freezing
the assets of Gaddafi and ten members of his inner circle, and restricting
their travel. The resolution also referred the actions of the government to
theInternational Criminal Court for investigation. 

• In early March, Gaddafi's forces rallied, pushed eastwards and re-took

several coastal cities before attacking Benghazi. A further U.N. resolution
 authorized member states to establish and enforce a no-fly zone over Libya
. The Gaddafi government then announced a ceasefire, but failed to uphold
it.
ECONOMIC CONDITIONS IN LIBYA
•Petroleum revenues contribute up to 58% of Libya's GDP.
• Governments with resource curse revenue have a lower need for taxes from
other industries and consequently feel less pressure to develop their middle
class.
• To calm down opposition, they can use the income from natural resources to
offer services to the population, or to specific government supporters. 
•Libya's oil wealth being spread over a relatively small population has allowed
for a relatively high living standard compared to neighbouring states. 
•Despite one of the highest unemployment rates in the region at 21% (latest
census), there was a consistent labour shortage with over a million migrant
workers present on the market. These migrant workers formed the bulk of the
refugees leaving Libya after the beginning of hostilities.
•Libya's purchasing power parity (PPP) GDP per capita in 2010 was US $14,878;
its human development index in 2010 was 0.755; and its literacy rate in 2009
was 87%. These numbers were lower in Egypt and Tunisia.
• Indeed, Libyan citizens are considered to be well educated and to have a high
standard of living] This specific situation creates a wider contrast between good
education, high demand for democracy, and the government's practices
(perceived corruption, political system, supply of democracy).
 THE UPRISING
• The uprising has been viewed as a part of the 
2010–2011 Middle East and North Africa protests which has already
resulted in the ousting of long-term presidents of adjacent Tunisia and
Egypt with the initial protests all using similar slogans.Social media
 played an important role in organizing the opposition.
Beginnings of open protest
Between 13 and 16 January, upset at delays in the building of housing units and over 
political corruption, protesters in Darnah, Benghazi, Bani Walid and other cities broke
into and occupied housing that the government was building. [59][60] By 27 January, the
government had responded to the housing unrest with a US$24 billion investment fund
to provide housing and development.[61]
In late January, Jamal al-Hajji, a writer, political commentator and accountant, "call[ed]
on the Internet for demonstrations to be held in support of greater freedoms in Libya"
inspired by the Tunisian and Egyptian uprisings. He was arrested on 1 February by
plain-clothes police officers, and charged on 3 February with injuring someone with his
car. Amnesty International claimed that because al-Hajji had previously been
imprisoned for his non-violent political opinions, the real reason for the present arrest
appeared to be his call for demonstrations.[62] In early February, Gaddafi, on behalf of
the Jamahiriya, met with political activists, journalists, and media figures and warned
them that they would be held responsible if they disturbed the peace or created chaos
in Libya.[
the protests and confrontations began in earnest on 15 February 2011. On the evening of
15 February, between 500 and 600 protesters chanted slogans in front of the police
headquarters in Benghazi. The protest was broken up violently by police, resulting in 38
injuries.[64][65]The novelist Idris Al-Mesmari was arrested hours after giving an interview
with Al Jazeera about the police reaction to protests.[64] In Al Baydaand Az Zintan, hundreds
of protesters in each town called for an end of the Gaddafi regime and set fire to police
and security buildings.[64] InAz Zintan, the protesters set up tents in the town centre. [64] The
protests continued the following day in Benghazi, Darnah and Al Bayda, leading to four
deaths and three injuries.[66] Hundreds gathered at Maydan al-Shajara in Benghazi, and
authorities tried to disperse protesters with water cannons. [67]
A "Day of Rage" in Libya and by Libyans in exile was planned for 17 February. [63][68][69] The 
National Conference for the Libyan Oppositionasked that all groups opposed to the
Gaddafi regime protests on 17 February, in memory of demonstrations in Benghazi five
years earlier.[63]The plans to protest were inspired by the 2010–2011 Tunisian and 
Egyptian uprisings.[63
EFFECT ON INDIA AND THE WORLD
 1. NO FLY ZONE
• The United Nations Security Council passed a resolution on enforcing a
no-fly zone over Libyan airspace and its intention to prevent attacks on
the civilian population by the Libyan regime.
• Resolution 1973 ``demands the immediate establishment of a ceasefire
and a complete end to violence and all attacks against, and abuses of,
civilians``. It establishes `a ban on all flights` in the airspace of Libya `in
order to help protect civilians`. It authorizes member states to take `all
necessary measures to enforce compliance with the ban`.

• Along with Russia and China, India has been critical of the ongoing
western air strikes launched against Libya on the ground that ordinary
Libyans would be affected and the air attacks would prove
counterproductive to the US' purported humanitarian objective.
• The External Affairs Minister, Mr S. M. Krishna, has urged the western
nations, which have imposed a ‘no fly zone' over Libya, to ceasefire and
called upon the Gaddafi regime and the rebel forces to abjure violence
and talk to each other
 2. CRUDE OIL POSITION
• Crisis in Libya, the third largest crude oil producer in Africa and a
member of OPEC, has pushed crude oil prices over $100/barrel in the
US and $112/barrel in London, the two international benchmarks for
crude oil (quoted prices as of 23 February, 2011).
• Libya`s crude output had fallen to fewer than 400,000 barrels a day - a
quarter of pre-crisis levels of around 1.59 million barrels a day in
January 2011 - and could stop entirely. Exports may be halted for `many
months` because of sanctions and damage to facilities across Libya
according to the International Energy Agency.
• These delays act as fuel to inflate oil prices and make them stay at
elevated levels for long periods. Higher oil prices place upward
pressure on inflation and downward pressure on economic activity.
Since most nations are net oil consumers, higher oil prices act as a tax
on consumption and leave their people genuinely worse off, reducing
their disposable incomes. As the higher oil prices threaten inflation,
central banks around the world are forced to act
 INDIAN FRONT

• The increased oil price acts as gravity to the Indian growth trajectory
with a USD 10 a barrel increase impacting growth by 0.3-0.5%. If the
USD 10 a barrel increase is passed through fully to the consumer, it
could increase inflation by 1.7-2%.
• High energy prices will invariably have negative impact on emerging
economies; most of whom are already facing high inflationary
pressure. For example, China and India, two Asian giants, have been
tightening the money supply to fight the inflation, especially the high
food cost. Global equities tumbled on high crude oil price and fear of
lower growth way forward.
• In India, as the increase doesn`t get passed through fully in various fuel
categories, the USD 10 oil price rise, in turn, increases the fiscal deficit
by 0.2% of the GDP (if government absorbs 1/3rd of the under-
recovery) and increases the current account deficit by 0.3-0.4% of the
GDP
• At crude oil levels of USD 110-115, under recoveries can go up to as
high as Rs 1,250 -1,500 billion from the earlier levels of around Rs 770
billion (on assumptions of crude prices of USD 85).

• With the FY 2012 budgeted number for government` s share of oil

subsidy at just Rs 236 billion, and these mounting under-recoveries
could inflate the oil subsidy bill by around Rs 400 billion at these oil
prices (assuming the government`s burden of 50%).

• The higher oil subsidy bill could inflate the FY 2012 net borrowing
number and increase the government`s cost of borrowings by hardening
the yields. The higher oil subsidy bill would also increase
the fiscal deficit in FY 2012 and stretch the government`s finance
 3. ECONOMIC INTERESTS
• India's national interests in Libya are essentially economic in nature. Considering
an estimated 18,000 Indians who work in that country, it is a considerable
contribution to the remittance economy and adds to our foreign exchange kitty.
• Otherwise, Indian companies, especially in the hydrocarbon, power, construction
and IT sector, have several ongoing projects in Libya. Besides, Indian oil majors —
Indian Oil, Oil India and ONGC Videsh — are increasingly involving themselves
with the Libyan hydrocarbon sector — both in upstream and downstream.
• Also, BHEL has successfully completed execution of the prestigious Western
Mountain Gas Turbine Power Project.
• Similarly, i-flex Solutions is implementing a project on core banking solutions
with the Central Bank of Libya and five other banks.
• Also, over the past three decades, Indian companies have executed several
projects there. These included building hospitals, houses, schools, roads, power
plants, airports, dams, transmission lines etc.
• The presence of Indian companies in Libya has risen significantly in
the last five years. This includes major PSUs such as BHEL, OVL, IOC,
Oil India, and private companies such as Punj Llyod, Unitech Ltd, KEC,
Dastur Engineering, Shapoorji Pallonji International, SECON Pvt Ltd,
Global Steel Ltd (Ispat Group Co.), NIIT, Sun Pharma, Simplex
Projects and Simplex Infrastructure Ltd.

• The bilateral trade figures for 2009-10 were at $844.62 million,

showing a significant upward trend since 2004-05, peaking to $
1,366.65 million in 2007-08 compared to $29.12 million in 2003-04.
 4. FISCAL POSITION
The European Central Bank, for example, is now planning to raise interest
rates in response to higher oil prices in a bid to keep inflation under
control. By doing so, European consumers and companies will be hit both
by the higher cost of fuel and by the higher cost of borrowing. 
If countries have relatively healthy fiscal positions, they might be able to
counteract the effects of higher oil prices through a well-targeted tax
cuts or an increase in fuel subsidies. 
But for much of the western world, whose economies have considerably
weakened by the sub-prime crisis, looser fiscal policy isn`t really an
option. 
Such long conflicts which push up oil prices are bad news to emerging
markets such as India, which are excessively dependent on oil imports to
meet its ever increasing energy needs. Indian economy imports almost
70% of its crude requirement and could face the brunt of this crisis. 
 5. IMPACT ON OTHER COMMODITIES
• The uprisings in North African and West Asia could likely have an indirect
impact on inflation in emerging economies, including in India. They are
expected to reflect in the rise in non-food prices in the months to come, which
would push up industrial raw material costs.
• Crude oil, bullion (gold & silver) and base metal have witnessed a significant
rise in prices in the last six months.
• The prices of base metals, which include copper, aluminium, nickel, lead, zinc
and tin, have risen by 15-49 per cent globally over the last six months, owing
to growing demand in the wake of the developed economies returning to the
growth path. Expected supply deficit in 2011 is keeping copper prices strong.
• Auto majors are already feeling the pinch with steel prices firming up.
• Silver, which was ruling at Rs 35,956 in November, has now touched Rs
51,445, posting a gain of around 43 per cent in the last three months. Gold
too, which was ruling at Rs 19,310 in November, is currently at Rs 21,190 - a
surge of more than 9.7 per cent
• Sumit Verma, research analyst of Geojit Comtrade, said, "Taking cue
from global prices MCX Nickel has been the top performing
commodity in the past three months with returns of 26 per cent,
while crude oil was up 18 per cent, copper, lead and zinc with gains
of 17, per cent each.“
• Unrest in the oil-rich West Asia stoked demand for precious metals
with gold - often sought in times of geopolitical tensions - rising
close to a lifetime high of $1,443.30 an ounce, while silver surged to
a 31-year peak.In Asia silver gained 2.1 per cent to trade at
$36.3675 an ounce, the metal's fresh high since 1980.
On Monday the price of silver rose by Rs 1,250 to Rs 54,450 per kg
in India, while gold traded at Rs 21,420, up Rs 200 in India.
• The euro briefly reversed gains against the dollar and peripheral
euro zone debt prices fell after Moody's cut its rating for Greece by
three notches to B1 and kept it on review for further downgrades,
although core German debt was little changed
 CONCLUSION
• When crisis erupted in Egypt, traders were anxious but not nervous as
the protests were more or less peaceful. Egypt controls the Suez Canal
operation and during the agitation, no disruption happened on Suez
route. The case is different with Libya. According to the latest data,
Libya pumped 1.6 million barrels of oil in January which is enough to
meet 8% of U.S. demand. Societe Generale estimates that the Global
GDP would decline by one percent, if crude oil prices increase by $20
a barrel. Before the current crisis, U.S. Energy Information
Administration (EIA) estimated that world real GDP (weighted by oil
consumption) will grow by 3.9% this year, if average oil price would
remain around $93/barrel, i.e. $14 higher than previous year price.
So, world economy is estimated to consume high energy cost and if
Libyan crisis spills over to neighbouring countries like Iran, then
situation will certainly become bizarre.
• EIA estimates that the world oil market will continue to remain tight
over the next two years. According to their estimate, world oil
consumption will grow by an annual average rate of 1.5 million
barrels a day through 2012. To meet this demand, the market has
to rely on OPEC supplies, as non-OPEC countries will average around
0.3 million barrels a day for this year and almost the same in next
year. This is the factor what traders are pricing in crude oil. Though
OPEC has promised to pump more oil if there is any shortage arising
out of the crisis, traders are apprehensive, as the problem will
happen within the OPEC region.  
• In 2010, world oil consumption grew by 2.4 million barrels a day
to 86.7 million barrel per day. This is the second highest increase in
consumption in 30 years after 2007. It happened at a time when
consumption in developed economies had not picked up.  
•  According to EIA estimate, the biggest contributors of oil
consumption would be China, Brazil and the Middle East in next
two years. Surprisingly, China is fighting hard to save the economy
from over-heating and Middle East is struggling with political
tension. So investors’ fear of high oil price and its subsequent
impact on global economy are probably justified at this point.