The impact of oil price hike can be gauged on account of broadly by four economic parameters: (a) balance of payment (b) inflation (c) manufacturing and infrastructure and (d) oil pool account.

Oil and oil product (POL) imports comprised of 15.3 per cent of the total import of the country in 1998-99. This represents a substantial decline in the share of POL in the total import of the country from 19.7 per cent in 1997-98, which was mainly due to fall in oil prices. Ostensibly, with the oil price hike it is presumed that POL share will go up in import basket in 1999-2000 and may impart negative impact on balance of payment. But taking into consideration the growth in overall imports and the structural changes in the POL imports, in view of the installations of Reliance Petroleum refinery, the impact is unlikley to be heavy on balance of payment.

With the resurgency in the economic activity, the overall imports of the country are bound to increase at a faster rate in the current year. This means that it is not the POL imports which alone will catapult the total import bill of the country, but also the non-POL imports are likely to be buoyant in the current year due to resurgency in the economy. Based on this assumption a galloping rate of growth of 0 per cent in the overall import has been projected in 1999-2000 (0.8 per cent in 1998-99), placing the import bill at $40.3 billion ($41.8 billion in 1998-99).

Assuming that the crude oil price may hinge on average somewhere in between $20-21 per barrel during the whole year and taking into consideration the fall in the imports of certain major oil products despite the increases in crude oil import due to installation of Reliance Petroleum refinery, the analysts have set the POL import bill at $10.5 billion in 1999-2000 ($6.4 billion in 1998-99). This represents an increase by 65.6 per cent in the POL import bill in 1999-2000.

Notwithstanding the surge in POL imports, the impact on the overall import bill of the country is seemed to be simmering. This is because the share of POL imports in the total import of the country is unlikely to increase substantially on account of higher imports of non-POL in view of the economic recovery in the country.

The other factor which will play a dominant role in counter balancing the fall-out of the whopping POL imports is the downtrend in gold imports. Gold import comprised 11.6 per cent of the total imports in 1998-99 and was the biggest item of imports, next to POL. The trend registered a dramatic turnaround with the hike in import duty from Rs 250 to 440 per 10 gm in January 1999. Gold imports slashed down by 12.1 per cent ($0.17 billion) during April-June 1999 and is projected to slide down nearly by $1 billion in the whole period of 1999-2000. It consoles the government that this fall in gold import alone will largely take care of the increase in POL imports, which was projected to increase by $4.1 billion.

Furthermore, it is noteworthy to mention that foreign debt plays a vital role in importing POL. Nearly 50 per cent of the foreign exchange requirement to import POL is met by ECBs and rolling line of credit. Therefore, even if the loft over increase in POL imports amounting to $3.1 billion remain uncovered, it would merely impact on the overall balance of payment in the country.

Thanks, the country is bestowed with lower rate of inflation. Even though speculation is rife that higher oil prices will fuel up inflation and may cause a concern to the new government, but the lower plank of inflation and less weightage of POL in the price index are not feared to incur the wrath on the inflation. Crude oil and petroleum products have weightage of 10.95 per cent in the wholesale price index (WPI).

While the government is shackled by socio-economic restrictions to raise the prices of two major components of petroleum products like kerosene and LPG in proportion to the increase in crude oil prices, it has to compensate the losses incurred on these two products by raising the prices of petrol and aviation turbine fuel through the measures of cross subsidy. In addition the government has to raise the prices of diesel oil which is currently linked to import parity. Notwithstanding the increases in prices of these three petroleum products the impact on inflation is viewed myopic since the weightage of these three products is only 3.15 per cent in the WPI.

Though the direct impact of the higher oil period on WPI is trifle, but indirectly it may incur burdensome as oil price hike is prone to fueling up the prices of certain sensitive products like primary consumable products, eg, vegetables and perishable goods. This is because of the reason that mostly the primary consumable products are transported by road and an increase in diesel prices means a cascading impact on these products. However, a cautious and preemptive measure can avoid this artificial inflation since the country is fraught with bumper crop yielding a far reaching impact on the supply side.

India is blessed with non-oil dependence so far as manufacturing and infrastructures are concerned, unlike developed nations. Excepting fertiliser and petro-chemicals, much of the energy requirement for manufacturing and infrastructure is met by coal. Oil-based energy serves the needs mainly for transport (diesel, petrol, ATF), cooking (LPG) and village level lightening and cooking (kerosene). Around 63-64 per cent of oil energy consumption goes in these sectors only. Therefore, the oil price hike has little impact on manufacturing and infrastructure sectors directly.

Indirectly, however, the burdensome impact cannot be overruled for certain industries, particularly the small scale sector, where the road freight attaches significance in the variation of input costs. However, never before has this factor caused such heavy burden on the earlier occasions of higher oil prices.

The only concern under which the government is reeling is the burgeoning oil pool deficit. Panic has been surmounted with the governmental caught into the vertex of unmanageable oil pool deficit. But things are not beyond control. A larger part of the oil bonds (63 per cent) were already paid and a surplus is accruable to two national oil producing companies due to increase in oil prices. These two factors yield greater solace to the government as they would help in insulating the carnage in oil pool account.

In summing up, the macro economic factors of Indian economy are less viable to contagion impact of higher oil prices as because oil is not the main source of energy. Oil accounts for only 32 per cent of the total primary energy requirement in the country. Deficit in the oil pool account is a paranoia as long it is a self-managed account without only budgetary support. It has not rendered any scar on the fiscal deficit of the country even on the earlier occasions whenever the oil prices zoomed.