Commodity Prices Makes or Dips India’s Purchasing Power

The impact of commodity prices on the Indian economy is recognizable and substantial, and ultimately makes or mars the purchasing power of India. The effect of commodity prices affects the prices of goods and services, as well as the direction of the prevailing interest rate as modulated by the RBI.

Gold and Indian Economy

Although in terms of production capacity, India only accounts for less than one percent of global output, it boasts of the 11th largest public holding on the earth. This is in addition to the massive private citizen holdings of gold in India, reputed to be the largest on earth.

A fall in the price of gold leads to a reduction in the wealth of the average Indian, and this translates to a reduction in disposable income and spending. The effect of this is a drop in the GDP during the period.

Arising from the gold standard , when gold prices plummet, the value of national reserves benchmarked against gold holdings will drop. In other words, the country will have lesser backup for imports, and a drop in the capacity to defend the rupee.

Oil Prices and the Indian Economy

India is far more susceptible to spikes in oil prices than many people possibly understands. The boost in the production capacity of Indian Industries is closely allied to the quantum of crude oil consumed.

As crude oil prices soar, the prices of goods and services increase, as manufacturers are compelled to adjust prices to safeguard their profit margins. Any failure to do this will lead to losses and the possibility of folding up and cessation of operations.

The import bill of India with respect to crude oil imports hovers around $150 billion at present, and this is for up to 80 percent of the country’s fossil energy needs.

Monetary and Fiscal Policy implications

While surging import bills ordinarily should translate to a general increase in the level of prices, concomitant actions by the RBI and the fiscal powerhouse, could mean a slew of actions.

At a time that imports become costlier, the monetary authorities could decide to reduce interest rate as a means of dampening the net effect of foreign bills. The bid to stabilize the country’s share of foreign markets is also another reason why interest rate can be lowered.

When interest rate is left to the dictates of the rigors of demand and supply alone, it will spike to levels that will be detrimental to national well being, and interest.