Why rise of crude oil prices is bad news for India

The rise in crude oil prices, that is hovering around $64 (Rs 4,200) a barrel (for Brent) on the back of political upheaval in the Saudi kingdom and voluntary production cuts by OPEC, is bad news for India. India, which imports most of its crude oil, had been the biggest beneficiary of low crude oil prices that had been in the range of $50-$55 (Rs 3,270-Rs 3,600) a barrel for the past couple of years.

This had helped India maintain a delicate balance on the current account deficit front, as also use the surplus from low import prices to pump prime government investments in infrastructure, as claimed by the government. Current account deficit is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the goods and services it exports.

However, this scenario could change. According to experts, for every $1 (Rs 65) rise in crude oil prices, the corresponding impact on the CAD will be to the extent of $1 billion (Rs 6,500 crore). Many feel that forex reserves would come in under pressure if oil remains above $60 (Rs 3,924) a barrel, and the economy can go into the danger zone if prices move beyond $65 (Rs 4,250). Crude prices had fallen from their $100 (Rs 6,540) a barrel highs in 2013 for around two years. They started rising again in 2016, recovering from below $40 (Rs 2,616).

With India importing 157.5 crore barrels of crude annually, a dollar increase in prices on a permanent basis would increase the yearly bill by roughly $1.6 billion or Rs 10,000 crore. In the financial year 2017, the oil import bill was $86 billion (Rs 5,62,400 crore), with physical imports of 215 million tonnes, averaging $55 (Rs 3,600) a barrel. Experts say that if prices reign above $60 (Rs 3,924) a barrel, the import bill would go up by $8-10 billion (up to Rs 65,395 crore).

Already prices of petrol and diesel have inched up. The high prices of oil are also likely to hit the margins of corporates, as input costs rise. Already, the finance ministry is struggling to rein in the country’s fiscal deficit, which has crossed 90 per cent of the year’s budgeted total in six months.

If the government is compelled to slash excise duty on petrol and diesel to check fuel price rise, it could come under pressure on the fiscal deficit front. The rise in the prices of Brent crude this year is from a trough of $44 (Rs 2,877) a barrel in June, and while this pales in comparison to the drop from $115 (Rs 7,520) to $45 (Rs 2,942) a barrel over June 2014 to January 2015, in percentage growth terms, it is still a large rise of 43 per cent.

According to Nomura, it is difficult to disentangle how much of this is due to increased demand from, for example, the synchronised global growth upswing, limits on supply, such as OPEC stringently sticking to production quotas and the recent decline in US shale rig count, or other factors like heightened geopolitical uncertainty in the Middle East.

Nomura says that although the economic impact is hard to gauge, as it depends not only on the size but also in the duration of the price rise, it is clear that there will be a reversal in the fortunes of those countries that had benefited from the earlier low prices of oil. This time around, those who will benefit will be countries such as Latin America, the Middle East and Russia, while India and other nations of Asia and Africa will be at the receiving end.

India, which has benefited from low crude prices which helped it, in turn, to maintain low inflation and rein in government expenditure, will now start facing the heat. JP Morgan had estimated that the windfall to the government in the form of a much lower oil subsidy bill and higher oil taxes, due to low crude oil prices in 2014 and 2015, was to the tune of 0.9 per cent of GDP.

This, in turn, had given the government room to plan higher public investments. It is public investments that have kept the economy on its wheels, at a time when private investments have reached a nadir after investors became cautious of a slowdown and demand dropped.

This will pose fresh challenges to the government that has already come under criticism for its failure to create adequate number of jobs. All the delicate balancing act could go awry if oil prices go further northwards.

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