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India Likely To Manage Rising Oil Challenges

India is in a sound macroeconomic position, to face various strong challenges and as a large importer of crude oil, India gained substantially from lower prices. It helped to curb inflation and had a good impact on both the fiscal and current account deficits. In October, Organization of Petroleum Exporting Countries (OPEC) members reduced production more than they had initially agreed to. Further, the internal power struggle in Saudi Arabia added to the uncertainty. According to the International Monetary Fund (IMF), Saudi Arabia will need oil prices to be at $70 per barrel for fiscal break-even in 2018. Members of OPEC will meet later this month and it is likely that they will work to push oil prices to around the $70 per barrel mark in the coming year.

India is in a strong macroeconomic position, a higher level of oil prices still faces challenge. India witnessed a significant positive terms of trade shock when oil prices fell by over 50 percent between 2014 and 2015. Higher tax collection, helped boost public investments. Households and firms also benefited. Higher oil prices could have the opposite effect and effect economic recovery in the coming quarters. They could have implications for growth, inflation, currency, current account deficit and fiscal deficit.

Oil price increases consumer price inflation by 0.6-0.7 percentage point. It also estimates that a similar rise worsens India’s current account balance by 0.4 percent of the GDP. Given India’s macroeconomic position, the impact of higher oil prices on individual indicators may not look worrying as of now. The latest monetary policy report of the Reserve Bank of India (RBI), for instance, shows that for baseline forecasts, the central bank has assumed the price of the Indian crude basket to average around $55 per barrel in the second half of the current fiscal. If oil prices move up to $65 per barrel, inflation could go up by 30 basis points for the fiscal and the real gross value-added growth could be lower by 15 basis points.

Expectation of higher inflation will reduce the chance of a potential rate cut and could affect market sentiment. Higher oil prices will also affect corporate India’s profit margins and could delay the much awaited earnings revival. A relatively less favorable macro outlook and a decline in profit margins would affect the equity market where stocks are richly valued. It will be extremely important to keep fiscal deficit in control in order to protect hard-won macroeconomic stability.

 

The Economic Survey’s concern over crude oil prices stems from India’s energy import bill of around $150 billion, expected to reach $300 billion by 2030. Rising oil prices present a challenge to India’s growth, the Economic Survey presented in Parliament. The Economic Survey projected the economy to grow in the range of 6.75 percent to 7.50 percent in the next fiscal year 2017-18. However, the International Monetary Fund has down its growth projection for India to 6.6 percent in 2016-17 and 7.2 percent in 2017-18. The concern over crude oil prices stems from India’s energy import bill of around $150 billion, expected to reach $300 billion by 2030.

India imports around 80 percent of its crude oil and 18 percent of its natural gas requirements. India imported 202 million tonnes of oil in 2015-16. Some possible challenges to growth exist. For example, the prices of crude oil have started rising and are projected to increase further in the next year.

The Survey backs UBI, says demonetization impact temporary. This also comes at a time of faltering domestic crude oil and gas production and output cuts announced by the OPEC. “The downward spiral in international crude oil prices resulted in a decline in oil import bill by around 18 percent which together with a sharp decline in gold imports led to a reduction in India’s overall imports,” the Survey said.

After remaining fairly stable for much of the last two years, international prices of crude oil have started to trend up. This along with rise in the prices of other commodities like coal, etc. could exert inflationary pressure and have the potential to adversely impact the trade and fiscal balances,” the survey added. “Rising oil prices are very much a possibility. For an economy which is vulnerable to any fluctuation in oil prices, it is better to err on the side of caution,” said Deepak Mahurkar, leader (oil and gas) at PwC India, a consultancy.

India’s energy consumption is expected to grow by 4.2 percent annually, faster than all major economies in the world. As a result, India’s share of global energy demand will increase to 9 percent by 2035. The direct impact of higher oil prices will be visible in the about 3.6 percent of the CPI basket that comprises diesel and petrol and unregulated liquefied petroleum gas (LPG) segment.

The sudden flaring up of oil prices to $62 a barrel will threaten the Indian economy as the impact can be severe for currency, foreign exchange reserves, inflation and interest rates.

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