Being a net crude oil importer, India is vulnerable to a sharp rise in oil prices that will affect the import bill and disrupt the fiscal position. But is there a silver lining?
The crude oil prices have risen to a multi-year high and the Indian rupee has slumped to a 15 month low. Being a net crude oil importer, India is vulnerable to a sharp rise in prices that will affect the import bill and disrupt the fiscal position. India’s Current Account Deficit (CAD), which was 2% of the GDP in the third quarter of the fiscal year 2017-18, could treble, a report said. But, is there a silver lining?
The rupee on Monday crashed to a 15-month-low of 67.13 against the US currency following a surging demand for the dollar as crude oil prices. A sudden flare-up in global crude prices rattled the forex market sentiment in a big way stoking concerns over widening trade deficit and higher capital outflows, analysts said. “FIIs continue to be net sellers in Indian equities, adding further pressure on the rupee,” Anand James, Chief Market Strategist at Geojit Financial Services told PTI.
As negative sentiments took over the market, importers rushed to cover their obligations, but could there be a silver lining to all of this? As Rupee fell, India’s exporters cancelled their previously booked contracts hoping a further fall in the rupee value near-term.
NITI Aayog’s Rajiv Kumar last September explained how depreciating rupee could be helpful in reviving India’s exports. He had said that a depreciated rupee will push the cost of energy higher, subsequently leading to lower consumption and less wastage. Moreover, it could also give a “nice kick” towards producing renewables at home.
As oil price rally threatens India’s fiscal condition, an oil hedge fund manager said that oil price even at $100 a barrel is not as bad as it looks. Pierre Andurand recently said that if oil price does not rise fast enough, it could even touch $300 a barrel. He explained that oil price at $100 a barrel may not be a bad development, and could “encourage enough investments outside of the US”.
However, rising crude oil price has a direct impact on India’s GDP. India could be one of the biggest losers in the world if crude oil hits $85 a barrel. Data from Oxford Economics and Haver Analytics show that if oil price hits even $85 a barrel, it will impact India’s GDP between 0.5% and 1% in next two years.
The Economic Survey 2018 estimated that a $10 per barrel increase in the price of oil reduces economic growth by 0.2-0.3 percentage points and worsens the CAD by about $9-10 billion dollars.