On a slippery slope
Any upward movement in global crude oil prices is always a bad news for India. For, higher oil prices impact Indian economy and Indians in two ways. First, import bill goes up, thereby widening the current account deficit, or CAD. As Union Petroleum Minister Dharmendra Pradhan highlighted recently, the country meets 70-75 per cent of its crude oil consumption through imports. We import 157.5 crore
Any upward movement in global crude oil prices is always a bad news for India. For, higher oil prices impact Indian economy and Indians in two ways. First, import bill goes up, thereby widening the current account deficit, or CAD. As Union Petroleum Minister Dharmendra Pradhan highlighted recently, the country meets 70-75 per cent of its crude oil consumption through imports. We import 157.5 crore barrels of crude a year on an average and the demand is growing every year. Last fiscal, the crude oil bill came to around Rs 5.62 lakh crore ($86 billion), with prices averaging at $55 a barrel.
Estimates reveal that every one-dollar upswing in crude oil prices will leave a billion-dollar burden on CAD. That’s not a small amount indeed as India is not for known for its expertise in export. The second adverse impact of rising crude oil is felt on the inflation front. Higher crude prices mean higher prices for petrol and diesel in the country, which will in turn lead to rise in overall prices because transport costs will go up. As a consequence, inflation will go up, forcing Reserve Bank of India either to keep interest rates unchanged or push them up.
But luckily for India, oil prices nosedived by two-thirds from a high of $115 in June 2014 to well below $28 a barrel in early 2016, its lowest since 2003. Incidentally, Prime Minister Narendra Modi, who rode to power with a thumping majority three years ago at a time when crude oil prices began to cool down, used lower prices to mop up much-needed revenues for the central government by steadfastly refusing to reduce petrol and diesel prices in domestic market. The central government also went on increasing taxes on fuels as and when crude oil prices fell. The state governments followed suit and enhanced local taxes, forcing consumers to cough up exorbitant cost for fossil fuels.
However, India’s three-year honeymoon with low oil prices seems to be ending now. Crude oil prices jumped by almost 48 per cent from a low of $43 in June this year to $64 a barrel last week. On Thursday, Brent crude prices were hovering at around $62. With political upheaval in Saudi Arabia, the world’s second largest oil producer, following the arrests of princes and elite in a purported corruption drive, and decline in production from US shale gas sources, crude oil prices are likely to go up further in coming months.
That should worry India, and, more so, the Modi government which used lower oil prices to its advantage. Already, the country’s finances are not in a good shape. The fiscal deficit has already crossed 90 per cent of the budgeted amount for the year in just six months. Economy is still reeling under the aftershocks of the note ban exercise and haphazardly-executed Goods and Services Tax (GST) as evidenced in the first quarter GDP numbers, which hit a three-year low. Against this backdrop, it will be interesting to see how the government will handle high crude prices.