How new crude oil dynamics will hit India; rising prices cast shadow on inflation, fisc

By: | Published: March 13, 2019 4:52 PM

Prime Minister Narendra Modi has recently speaking at the Petrotech 2019 conference, called for responsible oil pricing to balance the interests of both the consumers and producers.

(Representational Photo)

Rising crude oil price will likely widen India’s fiscal deficit and stoke inflation. Given this, there seems to be a strong case for India to take concrete measures to reduce its high dependence on imported crude oil and diversify its sources of energy.

Global oil markets are seeing shift in dynamics, with the US emerging as the leading supplier. It is expected to account for 70 per cent of the increase in global production capacity by 2024. Moreover, there will be an increase in contributions by non-OPEC countries such as Brazil, Canada, Norway and Guyana, according to a report by the International Energy Agency (IEA).

The changing oil dynamics may have an impact on India, whose annual volume of demand will increase and will equal China’s by 2024. Together India and China will account for 44 per cent of the global demand for crude oil by 2024, said IEA report.

Crude oil remains central to India’s growth as it makes up for around 25 per cent of its imports in a year, which help to fulfil 80 per cent of the country’s energy requirement.

The price of crude oil has remained above $55 per barrel since the mid of February due to sanctions imposed on Iran and Venezuela by the US, and production cuts by the OPEC and its allies, said CARE Ratings in a report. It is likely to rise, remaining between $65-$70 per barrel in the next few months, the report added.

READ ALSO: Inflation rises, but no need to worry as RBI may still cut monetary policy rate

The NDA government in its budget 2019 has set a fiscal deficit target of 3.4 per cent on the back of ambitious tax revenues, and continued continued low crude oil prices. The target looks difficult to achieve given the rising crude oil prices.

Every $10 per barrel rise in crude oil prices would increase inflation by roughly 49 basis points, or it would increase the fiscal deficit by 43 bps (as a percentage of GDP) if the government decides to absorb the entire crude oil price shock rather than passing it to the end users, Saurabh Ghosh and Shekhar Tomar in a recent study under the Reserve Bank of India (RBI).

Prime Minister Narendra Modi has recently speaking at the Petrotech 2019 conference, called for responsible oil pricing to balance the interests of both the consumers and producers. However, this needs to be accompanied by increasing use of alternate cleaner and affordable sources of energy such as solar and wind, in order to attain sustainable development, Narendra Modi added.

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