India is the world’s third largest Oil importing nation and world’s seventh largest economy. It is a major looser in the case of rising Crude price and a beneficiary in the event of falling Crude prices. The pace at which the economy is growing, increases the need of the country to import more and more of crude oil to meet the country’s industrial as well as domestic requirements.
With U.S imposing sanctions with regard to purchase of crude from Iran, India stands to face the double whammy of rising Crude prices as well as weaker rupee. India’s crude oil import bill for 2018-2019 rose sharply in March 2018 as country is dependent for 80% of its consumption needs on its Crude Imports. The CAD and Fiscal deficit are ballooning in the event of Trade Imbalance.
The Oil ministry pointed out to Bloomberg that India is more comfortable if Crude prices stay near to $50, thus $70 is way too high and would pinch India’s economy in a big way going forward if Saudi’s propel crude prices further to $80. To offset higher Crude prices the government either has to reduce Excise duty thus impacting state finances or reintroduce fuel price caps to control Inflation thus dent margins of Oil refiners.
Crude Oil and its Effects on Indian Economy
The Oil Ministry has been advocating bringing fuel price under the GST ambit which would reduce oil prices and provide immediate relief to vast majority of people thus reducing heightened Inflation as currently taxes make up 50% of the crude oil price pack.
(Related Article : ‘GST & its impact on Diesel and Petrol prices!‘)
The drop in crude prices helped the government to raise excise duty by Rs. 12 on petrol per litre and Rs. 13.77 on diesel per litre since April 2014 and also helped prune Current Account Deficit thus raising GDP expectations. Off late, Brent Crude prices have risen 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 rise to 3.5% of India’s GDP in the fiscal year 2018-2019 due to Trade imbalance. According to Nomura every $10 increase in Oil prices to affect India’s CAD by 0.4%.
Being an Election year Nomura has decreased India’s GDP growth to 6.9% from 7.8%. Dutsche Bank lowered its GDP forecast for India in lieu of widening CAD to 7.3% from 7.5%.
Going to Elections India is fighting with the negative impact of highest fuel prices in the country in recent years. India is reeling under toughest test to fight economic growth and Inflation under ever rising Oil prices.
(In order to learn more about crude you can take up Online MCX Certified Commodity Professional (E-MCCP))
Economic Impact of Crude price Rise
Let’s discuss on the economic impact of hike in crude prices;
Impact on Current Account deficit (CAD)
Current account deficit widens when value of imported goods exceeds the value of exported goods, indicating how much India owes to the world in foreign currency. With India’s ever increasing need for Crude to meet its consumption needs, which has grown from 77.3% in 2014 to 87.3% in 2018, the current account deficit also is widening at a faster pace thereby inflating its Import Bill.
Widening CAD also puts pressure on the value of the Rupee and weakens it against major basket of currencies. An SBI report suggests that Indian’s CAD could cross 2.5% of GDP for FY 2019 (providing oil price continues at $80 per barrel). Currently CAD is estimated at 1.9% for 2017-18.
Impact on Fiscal deficit
Rising crude prices adversely affects India’s Fiscal deficit which is the difference between government’s total Income and total expenses. India imports around 80% of its annual crude oil requirement which is approx 1.5 billion barrels a year from the world markets. Rising crude prices increases government’s total expenditure thus impacting fiscal deficit negatively. Fiscal deficit gives insight into the amount of money the government has to borrow to meet its expenditure. Higher fiscal deficit to negatively impact India’s economy.
Impact on Rupee
Rising crude prices affects rupee also adversely, as more money flows out of the system to buy dollars for making crude payment. Thus sometimes RBI moves in to stem rupee fall. Depreciating rupee has a weakening effect on the country’s economy. Rupee is at its life time low leaving India in a vulnerable spot in the event of any further weakening of macros. Weakening rupee benefits the exporters and is a big drag on the importers.
Oil is a very essential commodity with daily necessity for domestic as well as industrial needs. Oil is an essential raw material for many segments of the industry. Thus any increase in oil to fuel Inflation in all segments like cost of producing goods to transport which would finally be passed on to end users thus making goods very costly.
Impact on Economy
Rising crude prices adversely affects the economy and dents its growth prospects taking into account all the above factors. Most of the Indian Industries need crude for its Industrial need for the production of its end product thus rise in crude increases their input costs and decreases margins. Thus some of the sector getting negatively impacted would be Oil & Lubricants, Tyre, Paints, Plastics, Airlines etc. The profitability of these Industries to be impacted due to rise in input costs. O
n the other hand the Oil exploration companies stands to gain out of it. The stock markets, the country’s biggest economic revival barometer to weaken due to negative repercussions on Indian economy due to rising crude. The midcaps and small caps are the worst hit as they will face problems passing on the input costs to the end user. The economic revival thus would be very fragile with increasing CAD, weakening rupee and rising fiscal deficit.
Decline in Crude price & Impact on Economy
CAD or Current Account Deficit
India being the largest importer of Crude thus any decline in crude prices helps it to prune its current account deficit upto the tune of Crude imports which accounts for one third of its total import volume. Thus for this reason price of crude matters a lot to Indian economy. A fall in oil prices by $10 per barrel helps reduce CAD by $9.2billion according to a live mint report. Thus this impacts India’s GDP positively by 0.43%. Thus fall in Crude price to lower India’s CAD and hence boost GDP growth.
The reduction in crude oil prices reduces the burden of subsidy from the Governments shoulders thus in turn reducing the under recoveries. The government does not have to burden itself with the subsidy burden as the reduced crude prices do not need the subsidy to be shared between the Oil companies and the Government. The government expenditure reduces due to reduction in Import bill thus reducing fiscal deficit. Thus this will help the government in pruning previous dues.
The reduction in crude prices affects as Indian economy as a whole due to its direct usage in Transportation of goods and services. The Inflation reduces due to reduction in crude prices in turn helping Industries dependent on Crude to increase profit and productivity owing to reduction in their Input prices. The end user benefits as cut in direct costs is passed on by the company to the consumers. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%, according to a Moneycontrol report.
Impact on Rupee
Rupee’s value is dependent on its demand in the currency market. A high CAD means a country has to sell its currency and buy dollars to pay its bills thus any fall in crude decreases CAD and strengthens rupee to that extent. The rupee still remains neutral to any decline in crude prices as the weakening crude increases dollar strength being inversely related. Thus negating any beneficial effect from decreasing CAD.
Export of Petroleum products & Indian Crude Oil Production by Region
India is the sixth largest exporter of petroleum products in the world amounting to $60 billion annually. Thus any decrease in crude prices adversely affects the exporters. Any decline in exports is a bad news for India’s current account deficit as it again creates imbalance between India’s balance of payment.
Though Manufacturing Industries benefits from drop in Input costs and country benefits from improving CAD and fiscal math still overall the major trade partners who imports petroleum products from India may refrain from buying as it not being cost accretive for them as rupee and dollar both remain strong.
Many countries have put import curbs to save their economy thus any further decline in imports due to declining crude oil would be a deterrent for India’s exports. Thus only Oil marketing companies and manufacturing industries benefits from crude price decline as it increases their bottomline. Thus India remains neutral to any fall in Crude price. The Industries that stand to gain from it are Paint, Tyre, Airlines, Plastics, Oil and lubricants etc.
Government is working to reduce its dependence on crude by 50% thereby working towards improving India’s CAD, Fiscal deficit and economy as a whole in next ten years. Thus it’s focusing more to explore its Crude Oil Producing regions which can going forward reap benefits for the nation as a whole. If the going goes smooth India may see a silver lining going ahead both in terms of Crude Imports and strong Currency.
This is a guest post by Smita Mohta of Elearnmarkets.com .
About the Author
Smita Mohta is currently working as a Knowledge Advisor with Elearnmarkets.com and StockEdge. She has 15 years experience into the fundamental and Technical research of Equity and Commodity markets. The Author has prepared many stock specific reports and shared sector specific ideologies with its Broking House and its Clients. The Author is a value researcher with proven expertise in finding valuable growth oriented scripts giving phenomenal returns. She has attended many con calls and initiated many seminars while in work as Research Analyst.
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(Image courtesy of satit_srihin at FreeDigitalPhotos.net) (Post first published on : 15-October-2018)