In 2014, when Narendra Modi was elected for the Prime Minister's Office, not only did he get a thumping majority but a little bit of good luck too -- oil prices. Will oil be Narendra Modi's best friend again ahead of 2019 polls?
In 2014, when Narendra Modi was elected for the Prime Minister’s Office, not only did he get a thumping majority but a little bit of good luck too — crude oil price, which was on a downward streak. The Narendra Modi government gained significantly from the two-and-a-half-year-long oil price windfall, which helped keep India’s deficits low and fuel taxes high. But in December 2017, the oil was back up to $60 a barrel — and that’s when the trouble for Narendra Modi began.
Oil price at $60 a barrel was still at a comfortable level for the government and at about $68 a barrel, the government could bear the shock. But in May, oil breached $80 a barrel mark, which not many people had expected. “We knew that oil prices were going to go up but nobody expected it go up to $80 so soon,” Anjali Gupta, Chief Economist at PhillipCapital India, told FE Online earlier.
The oil price is understood to have surged to $80 a barrel faster than expected as the Venezuelan economic crisis led to a bigger production cut than intended. The production cut target by OPEC and non-OPEC members reached an unprecedented 166% in April.
However, in the last 7-8 days, oil prices have receded on news that the US crude production may go up and that OPEC is considering easing supply curbs. Gulf OPEC countries will reportedly meet in June to discuss when the exporting group can boost oil production to cool the oil market, and how many barrels each member can add. Meanwhile, crude oil production is expected to rise more than previously expected to 12 million barrels per day by the fourth quarter of 2019, Energy Information Administration said earlier this month.
Geopolitical tensions such as US President Donald Trump walking out of Iran Nuclear deal may have added to oil volatility but Barclays’ head of energy commodities research Michael Cohen told CNBC that he expects oil to average at around $68 a barrel. But Goldman Sachs differs. Despite recent turbulence, the financial services giant has reiterated that the oil price is going go up to $82.5 a barrel in coming months.
Since India imports 80% of its oil, its prices have a significant impact on Indian economy, way beyond just a surge in fuel prices. Every $10 per barrel hike in crude oil price affects the GDP growth by 0.2-0.3 percentage points, inflation by 1.7 percentage points, and widens the Current Account Deficit (CAD) by $9-10 billion, the Economic Survey 2018 had said.