Iraq Crisis: What does increase of $10/barrel mean for India?
Sat Jun 28 2014, 12:57 hrs
The unrest in Iraq threatens to aggravate oil supply shocks with possibility of spill-over to other countries. Given India’s vulnerability to a rise in global crude oil prices, considering that almost 75-80% of consumption is met through imports, the sudden rise has the potential to dislodge the envisaged economic recovery in the current fiscal, according to a Care Ratings report. Go through our gallery to know its impact on Indian economy. (Image Credits: AP)
Widen the CAD: According to the report, estimate of CAD for the year is 2.5% of GDP assuming stable crude oil prices and a recovery in industrial production. (Image Credits: AP)
Put pressure on exchange rate: The rupee has shown signs of strengthening in the recent past on account of a fairly steady trade deficit and higher capital inflows. With crude oil prices increasing, it would pressurise the import bill and hence the traded deficit further. (Image Credits: Reuters)
Hamper fiscal consolidation intent: The fiscal consolidation intent of the government by way of subsidy reduction could fail to materialise. Petroleum subsidies were 12% lower in FY14 and were expected to be lowered further in the final budget for FY15. An increase in crude oil prices could result in the contrary. (Image Credits: Reuters)
Aggravate Inflation: The rise in crude oil prices could further aggravate the inflation situation. It is estimated that an increase of 10% in crude oil prices (which is roughly $ 10 per barrel) will increase WPI inflation by roughly 0.7%. (Image Credits: Reuters)
Delay action on interest rates by the RBI: With oil prices rising and the possibility of higher fuel inflation adding to inflationary expectations, any sustained increase in prices would hold back any decision to lower interest rates. In fact, in case inflation increases sharply, a rate hike may not be ruled out.
As an immediate resolution of the crisis seems unlikely, it could be a long, drawn-out conflict. India could seek diversification for its crude oil imports and build up on its reserves to tackle risk associated with geo-political instability. (Image Credits: Reuters)