Twin recipe for twin deficit and twin balance sheet problems.

India's stock market index the Sensex fell over 700 points at one point yesterday and closed down 642 points at 36,481. Why? Because of attacks on Saudi Arabia's oil processing plant at Abqaiq and the Khurais oilfield. "Brent crude futures, the international benchmark, rose as much as 19.5% to $71.95 per barrel at the open, the biggest jump on record." India imports over 80% of its oil so any increase in prices hurts the economy. "Every dollar increase in the price of oil raises the import bill by Rs 10,700 crore (Rs 107 billion) on an annualized basis. India spent $111.9 billion on oil imports in 2018-19." "According to Nomura estimates, every $10/bbl rise in oil price would reduce gross domestic product (GDP) growth by about 0.2 percentage points, widen the current account deficit by 0.4 percent of GDP, widen the fiscal deficit by 0.1 percent of GDP and add around 30 basis points (bp) to headline CPI inflation." If the rupee depreciates against the dollar, then for every 5% drop the "headline inflation will increase by 20 bp". Given this background, T Kundu asked, "Is India ready for a global shock?" The Indian economy is in a much stronger position than in 2013 when the rupee dropped to 69 to the dollar on talk of reducing quantitative easing by the Federal Reserve in the US -- the famous 'taper tantrum'. There are other problems. Excessive bank lending after the 2008 crisis has resulted in companies saddled with enormous debt, which they cannot repay, which means banks are struggling to clear their books of bad loans amounting to nearly 10% of total loans. This is the 'twin balance sheet problem'. On the other hand, "Households' financial savings currently account for 11% of GDP, the lion's share of which is already being gobbled up by by the public sector (including state and central governments, and CPSEs) ." CPSEs are central public sector enterprises. If savings rate continues to decline and cost of imports rises, "The twin deficit (fiscal and current account deficit) problem which India tamed successfully after 2013 mini-crisis, may be back in play." Former Vice Chairman of NITI Aayog Prof A Panagariya has a "Recipe for Recovery". He rubbishes claims that the auto industry contributes 50% of manufacturing and is about to lose 3,50,000 jobs. S Viswanathan wrote a robust defence of the auto industry, pointing out that vehicles attract tax at rates of 28-50%, while margins for manufacturers are less than 10%. Tax on self-charging hybrid cars range from 28 to 43%. Panagariya recommends to "let the rupee depreciate" and to allow inflation to rise to 5-6%. "Food and beverages have the highest weight of 54.18% in CPI, while services sectors such as health, education and amusement have a combined weight of 27.6%." Higher costs for these is a sure way to lose elections. Commercial borrowings account for 38% of India's total external debt of $543 billion. A weaker rupee will only increase the total and may lead to default. Panagariya's recipe is most likely to cause severe indigestion for our politicians. Keep our fingers crossed and hope for the best.