How rising crude oil price affects India’s GDP growth, inflation, and current account deficit

By: | Published: January 29, 2018 6:16 PM

The Economic Survey 2018 estimates that every $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points. The survey said that country's economic growth is expected to grow between 7 and 7.5% in the fiscal year 2019, while flagging concerns over rising crude oil price.

fuel, fuel pump owners, hunger strike, fuel pump owner calls for strike, vat on petrol, vat on diesel, punjab government, petrol pump dealersHow rising crude oil price affects India’s GDP growth, inflation, and current account deficit. (Image: PTI)

The Economic Survey 2018 estimates that every $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points. The comprehensive annual document on the Indian economy, which was tabled on Monday in the Parliament by Finance Minister Arun Jaitley, said that country’s economic growth is expected to grow between 7 and 7.5% in the fiscal year 2019, while flagging concerns over rising crude oil price.

The survey said that the oil price is expected to grow by average 12% in the FY19. The Economic Survey estimated that every $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points, increases WPI inflation by about 1.7 percentage points and worsens the CAD by about $9-10 billion dollars. India imports 82% of its total oil requirement and Brent crude oil makes up around 28% of India’s total imports.

“The average oil prices are forecast by the IMF to be about 12 percent higher in 2018-19, which will crimp real incomes and spending—assuming the increase is passed on into higher prices, rather than absorbed by the budget through excise tax reductions or by the oil marketing companies,” the Economic Survey 2018 said. And if higher oil prices require tighter monetary policy to meet the inflation target, real interest rates could exert a drag on consumption.

Meanwhile, after three and a half years, the petrol price in Mumbai has breached the Rs 80 per litre mark on Monday on back of higher crude oil prices, completely reversing the impact of excise duty cut announced in October when it was just 1 paisa short of hitting Rs 80. Now as the Budget 2018 is just around the corner, the oil ministry is pushing for a cut in excise duty on petrol and diesel to cushion the impact, Reuters reported quoting two unidentified officials.

While the oil minister Dharmendra Pradhan has long been advocating for bringing fuel prices under the ambit of the Goods and Services Tax, if an excise duty cut is announced in the Budget 2018, it is likely to give an immediate relief to a vast consumer base.

The continuous rise in crude oil prices is putting an end to the three-year-long low oil price windfall, which allowed the government to hike excise duty by Rs 12 on petrol per litre and Rs 13.77 on diesel since April 2014. In the last three months, the Brent crude oil price has gone up by $18 per barrel, while petrol and diesel prices have gone up by over Rs 3 per litre. Morgan Stanley has said that the fiscal deficit is likely to increase to 3.5% of the GDP in the fiscal year 2018-19.

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