After a three-year-long low oil price windfall, the Narendra Modi government is facing the biggest macroeconomic problem -- the rallying crude oil price.
After a three-year-long oil windfall, the Narendra Modi government is facing the biggest macroeconomic problem — the rallying crude oil price, and if the trend continues, it may even hit $100 a barrel in future. 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, making the country sixth biggest loser.
If the crude oil hits $85 per barrel, the biggest loser will be Philipines, Greece and Bulgaria followed by Hong Kong, China and India, the chart shared by Uday Kotak showed. “Interesting table on impact if oil goes to $85. Impact on India GDP between .5 and 1%. Clearly, macro headwinds here even as micro getting better (sic),” top banker Uday Kotak said in a tweet.
Earlier, Uday Kotak had said that the Indian bond markets are very sensitive to oil prices. He said that the price of oil has significant implications for current account, fiscal situation, and on inflation. The Chief Economic Advisor Arvind Subramanian too had warned about rising crude oil price in the Economic Survey 2018. “It is 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,” the report released before Budget 2018 said.
The Narendra Modi government, in this year’s budget, dedicated little fiscal room to farmers, senior citizens, salaried class, and the SMEs, while the risk of higher oil price found no mention. Finance Minister Arun Jaitley after the budget had told DD News that the government is comfortable with the oil price at $60 a barrel, and can absorb risk at about then-current level ($70). With oil price rising, some economists fear that it may derail the fiscal plan of the government.
Prime Minister Narendra Modi recently asked the OPEC countries subtly to not raise oil prices artificially. He said that it is self-defeating in nature. The oil prices are rising mainly on the back of production cuts by OPEC members and non-members led by Russia.