Revenge of the old economy

Today, as I sit down to write this article, someone (preferably a Central Banker) somewhere would be worried and thinking about the strategies to combat an evil called inflation. Inflation has today become a global phenomenon and has stopped the wheel of growth in many emerging economies like China and India. It has also managed to send developed economies into the recessionary phases. To me, this is the revenge of the old economy. Inflation is today fuelled by commodities like energy, food and primary articles sectors which were neglected for nearly two decades. The old economy was neglected due to the resurgence of the new economy sectors like retail, IT & ITES. Commodities like metals and energy have been reeling under the pressure of underinvestment for nearly two decades.

This decade definitely belongs to commodities, which has witnessed one of its best bull run in the recent times. It was their time to take revenge, it was their time to get noticed and the revenge has not been sudden but gradual. Early part of the decade saw interest developing in commodities when the demand started to pick up as the wheel of economic growth started to move and countries like India and China started to demand more to meet their consumption needs. The second phase came during the middle part of the decade when demand from the industries grew and we saw investments growing in the manufacturing sector pushing the prices further up. The third phase has left the policy makers worried and have led them to make certain policy changes which has hampered growth.

Commodity prices cannot go up forever and breaks will have to be applied either for good or for worse. There has to be a conclusive policy to stop commodities prices from rising to levels which can threaten world economy. So far, central banks have just been mere spectators and their steps to curb inflation and control prices have failed miserably. The solution is not so easy and we will not be able to achieve it if we take short term steps. The solution to this problem lies in the cause of the problem. Cause: a) Underinvestment & b) Food prices have risen due to usage of food products for fuel.

Also the issue with regards to global commodity crisis is such that it requires efforts from the global community to combat the current situation. Lone efforts from India, China or US won’t work. It will have to be a conclusive plan and something that all of them needs to work together. There has to be an UN backed policy on food and food products. Usage of Agricultural products for energy purpose would solve our short term energy crisis but it would spiral into a food crisis for our coming generations. This would then make us more dependent on GM foods and that is not a good sign. Farming has been neglected for a while and most of the farm land is been used for SEZ in various countries this is something that is calling for a dooms day scenario. Our current hunger to grow at any cost is going to affect our coming generations.

The second problem is that of underinvestment for nearly decades commodities have been under the phase of lack on investment. We haven’t heard of any big investment done in any oil field or we did not hear of any big ticket investment in the mining of metals. It is only now that we are hearing mining and oil companies doing investment in natural resources. These investments would bear fruits only after 4-5 years till then it would be too late by then. Just to put it into perspective crude oil one of the most important commodity on the planet earth is in a demand supply conundrum. Right now oil demand is around 87-88 million barrels per day. Total production capacity available is at 90 mbpd. Which means currently we have a spare capacity of 2 mbpd all of it been in Saudi Arabia. By 2013 it is estimated that oil demand shall cross 95 mbpd and in the next 5 years additional capacities of 6 mbpd would likely to be on track. This means that the spare capacities would be reduced by 50%. This situation is not only in oil but in other natural resources also. What we need today is a spate of public and private investments in the natural resources sector. There are other concerns grappling this sector it is capacity concerns with allied industries like rail and port. There are capacity issues which lead to artificial shortages just like what we are facing in coal market. These also have to be addressed by one and all.

Sometimes these price movements’ leads to countries taking extreme policy measures like curbing exports and this leads to shortage in another country. Since this is now becoming a global phenomenon it actually requires policy measure that incorporates interest of all countries. I think the UN has to be more proactive and involve World Bank to undertake projects in countries where there is dearth of investment but ample resources.

If we don’t take notice of it today than it would be too late for us. The “Revenge of the old economy” would lead to disaster.