India is one of the world’s biggest oil buyers, representing around 4 percent of worldwide utilization. Just the U.S. also, China outrank India in such a manner, making it a key player in the oil market.
While India’s oil utilization has seen amazing growth in a previous couple of years, the recent rise in oil prices may soon force the country to downsize its dependence on oil importation. In this new oil price environment, preceded with import growth would put a significant strain on the country’s economy.
As the economy has profited from high taxation on oil and diesel, India has experienced a retail vitality price essentially higher than that of its South Asian neighbors – with taxes accounting half of the aggregate retail cost of fuels in India.
As the price of oil fell, the Indian government increased the excise duty on gasoline nine times over the course of three years. The failure of the government to pass these savings on to the consumer resulted in the alienation of the poorer classes of Indian society.
At the display, there is a $10.2 billion difference between the market and retail price of oil in India. This gap has prompted India having one of the biggest state-supported social orders in the world, with just Saudi Arabia, Iran, Venezuela and China spending more on the state support system.
6 effects of rising crude oil prices on the Indian economy
Higher prices: adverse impact on fiscal deficit:
India imports 1.5 billion barrels of crude oil each year. This comes up to around 86% of its annual crude oil requirement. So, the surge in crude oil prices could increase India’s expenditure, thus adversely affecting India’s fiscal deficit – the difference between the government’s total revenue and total expenditure. Fiscal deficit indicates the amount of money the government has to borrow to meet its expenses. A rise in fiscal deficit could negatively affect the economy as well as markets. The fall in crude oil prices was a major contributing factor in the reduction of India’s fiscal deficit between 2014 and 2016, according to a report by Livemint. A few years back, we explained the impact of a falling crude oil price on fiscal deficit.
Impact on the rupee:
The rise in crude oil prices has a clear impact on the Indian rupee. On 24 May 2018, the rupee closed at 68.34 against the US dollar. This is a near 18-month low for the rupee, and only 0.6% away from its all-time low of 68.825, according to a Livemint report. In addition, if crude oil prices remain at these high levels, the rupee is further expected to depreciate by the year-end. Rupee depreciation has a reverberating effect on the Indian economy and even the stock market. To arrest the rupee’s fall, the RBI often takes a few steps. Here’s a look at how the RBI defends the falling rupee.
Impact on Current Account Deficit (CAD):
India’s dependency on crude oil imports has only been increasing over the past few years. The dependency rose from 77.3% in FY2014 to 83.7% in FY2018. The rise in crude oil price has a big impact on the Indian Current Account Deficit (CAD). CAD is a measure of India’s trade where the value of goods and services imported exceeds the value of goods and services exported. CAD essentially indicates how much India owes the world in foreign currency. An SBI report suggests that Indian’s CAD could cross 2.5% of GDP for FY2019 (providing oil price continues at $80 per barrel). Currently, CAD is estimated at 1.9% for 2017-18. Widening CAD further puts pressure on the rupee’s value as well as the rest of the economy.
Impact on Sensex, midcaps:
The Indian stock markets have faced a lot of pressure due to the rise in crude oil prices. Between 1 and 24 May 2018 alone, the Sensex fell by 2.3%. In comparison, the BSE small-cap and mid-cap indices have had it worse with a drop of nearly 8%. With crude oil prices touching $80 per barrel, there has been a sell-off in small-cap and mid-cap stocks. Analysts warn that this could continue if the crude oil price continues to rise. Here’s what you can do.
Impact on stocks:
A lot of Indian companies depend on healthy crude oil prices. This includes tire, lubricants, footwear, refining and airline companies. The profitability of these companies is adversely affected due to higher input costs. This could negatively impact stock prices in the near term. On the other hand, oil exploration companies in the country could benefit from a rise in oil prices.
Impact on inflation:
Oil is a very important commodity and it is required to meet domestic fuel needs. And in addition to that, it is a necessary raw material used in a number of industries. An increase in the price of crude oil means that would increase the cost of producing goods. This price rise would finally be passed on to consumers resulting in inflation. Experts believe that an increase of $10/barrel in crude oil prices could raise inflation by 10 basis points (0.1%).