For China and India, 2015 should be a pivotal year. Both Chinese President Xi Jinping and Indian Prime Minister Narendra Modi have for months been making grand pronouncements about structural change, while moving only timidly to fulfill them. With oil dropping below $50 a barrel, some of the urgency to implement those painful reforms is sure to fade away. So too, however, will the excuses for not acting.
Across Asia, the lowest crude prices since 2009 are an almost unmitigated boon. Already, they've given Indonesia and Malaysia room to curb budget-busting fuel subsidies (although Malaysia, an energy exporter, will suffer from a drop in oil revenues). In Japan, the Philippines, Singapore, South Korea, Taiwan and Thailand, sliding energy costs stand to boost disposable incomes, household demand and corporate profits. Economist Glenn Maguire at Australia & New Zealand Banking Group thinks this "confidence multiplier" will lead to higher-than-expected growth. The drop in oil prices so far could add as much as 1 percentage point to global output. "We think this will be the defining, constructive dynamic that underpins Asian growth in 2015 and most probably 2016," Maguire says.
As India's Modi prepares to unveil his first full budget in February, he could hardly ask for a fairer tailwind. In the short run, says Peter Redward, principal at Redward Associates, oil trends will lead to a "massive improvement" in India's current account deficit, repair the government's balance sheet and restrain inflation, which should allow the central bank to cut rates.
Whether the pickup in growth can be sustained will depend on how bold Modi chooses to be next year. The Indian prime minister wisely slashed diesel subsidies when oil prices dropped, easing the hit consumers felt at the pump. But that was the easy part; it’ll be tougher to cut subsidies on liquefied petroleum gas and kerosene, which millions of Indians use for cooking. Together with diesel, subsidies for those two fuels cost the government $11 billion in the last fiscal year. Likewise, Modi will have to spend considerable political capital to abandon discounts on fertilizer. Without such cuts, it'll be difficult to free up space for more productive fiscal spending on infrastructure, education and health care.
Nor can Modi afford to delay supply-side reforms. In addition to lower fuel bills, 2015 will feature a light election calendar: Only two of India’s 29 states will hold contests. This could well be the prime minister's best chance to push through politically difficult measures, such as allowing foreigners to hold majority stakes in key domestic sectors.
For its part, despite lower energy bills, China is worried about faltering growth: That's at least part of the reason why the government just accelerated 300 new infrastructure projects worth more than $1.1 trillion. Still, like Modi, Xi would be wise to avoid short-term thinking. Falling oil prices risk derailing momentum in both countries to reduce their carbon footprints. Cheaper oil "should not be an excuse to slow or stall alternative-energy and energy-efficiency policies," Maguire says. "Medium-to-longer term demographic and population pressures will still require Asia to de-carbonize growth and forge radical new paths in energy efficiency over the longer term."
As Rajiv Biswas of IHS Global Insight points out, lower oil costs should make it easier for China's central bank to cut interest rates and offer relief for hard-pressed borrowers. Xi needs to exploit those relaxed monetary conditions to rein in state-owned enterprises as he's promised to do. Only by shifting the economy away from inefficient smokestack industries, and unleashing the animal spirits in China's more productive private sector, will Xi be able to set the economy on a truly sustainable growth path.
China already counts as a "grand winner," says Kenneth Courtis, former Asia vice chairman at Goldman Sachs, as a shrinking fuel bill has allowed the country to build up its strategic energy reserves. But cheaper oil on its own won't eliminate the structural challenges facing Asia's biggest economy. Both Xi and Modi have been presented with an opportunity only; the burden remains on them to grasp it.
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