The Indian government has announced several measures over the past few weeks to tackle the economic fallout from the ongoing West Asia conflict. From increasing duty on gold to raising fuel prices twice within a week and announcing austerity measures, the government has rolled out several initiatives. However, Kotak Institutional Equities believes these measures are unlikely to materially reduce consumption of fuel or gold.
The brokerage said fuel price should have been hiked by Rs 13-17 per litre and GST on gold should also have been increased.
“The central and state governments’ recent actions to manage the economic fallout of the ongoing West Asia war may not be adequate to address India’s growing macroeconomic challenges,” the brokerage said.
Fuel prices may need another Rs 13-17/litre hike: Kotak
Kotak believes the recent Rs 3 per litre and additional 90 paisa increase in petrol and diesel prices is not enough to offset the losses faced by oil marketing companies (OMCs).
The brokerage estimated that OMCs are currently losing around Rs 25,000 crore every month because of under-recoveries.
Diesel under-recovery stands at around Rs 11.40 per litre, while petrol under-recovery is estimated at Rs 14.30 per litre. The brokerage added that fuel prices may need to rise by another Rs 13-17 per litre to fully offset the losses.
According to PTI, petrol and diesel prices were hiked by another 90 paise per litre on Tuesday, a second hike within a week.
GST hike would have been better than Gold duty hike: Kotak
Kotak also highlighted that the increase in gold import duty from 6% to 15% may delay gold purchases by households temporarily but it has also pushed up domestic gold prices and raise the value of household gold holdings. “higher GST rates may have been more effective,” Kotak said.
Higher crude price could hit inflation and growth
Kotak now expects India’s FY27 GDP growth at 6% and average inflation at 5% saying that the macroeconomic outlook has become more challenging as crude oil prices remain elevated for longer than expected. Crude oil prices have been hovering around $100/barrel since the beginning of the war and briefly crossed $120/barrel as well.
Concerns over fiscal deficit and CAD
Kotak said managing inflation, fiscal deficit and current account deficit simultaneously will become increasingly difficult if crude oil prices remain high.
The brokerage estimated that every $10 per barrel increase in crude oil prices could add nearly $22 billion to India’s current account deficit.
Kotak also projected FY27 current account deficit at $99.5 billion if crude averages $95 per barrel. That number could rise to $118.7 billion if crude oil prices reach $105 per barrel.
Conclusion
Kotak Institutional Equities said the government may have to take tougher and possibly unpopular measures if crude oil prices remain elevated and the West Asia conflict drags on further. The brokerage warned that balancing inflation, growth, fiscal deficit and current account deficit simultaneously could become increasingly difficult for policymakers in such a scenario.