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5 ways falling oil prices affect India
Oil is one of the most important commodities in recent times. Much of the economy depends on oil. This is why prices of oil matter to almost every economy. Global crude oil prices are down nearly 40% this year to $60 per barrel-levels from $110/barrel at the start of the year. This has caused a crisis in countries like Russia, which depends on oil exports.
Here are 5 ways the fall in oil prices affects India:
Current account balance:
India is one of the largest importers of oil in the world. It imports nearly 80% of its total oil needs. This accounts for one third of its total imports. For this reason, the price of oil affects India a lot. A fall in price would drive down the value of its imports. This helps narrow India's current account deficit - the amount India owes to the world in foreign currency. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion, according to a report by Livemint. This amounts to nearly 0.43% of the Gross Domestic Product - a measure of the size of the economy.
Oil price affects the entire economy, especially because of its use in transportation of goods and services. A rise in oil price leads to an increase in prices of all goods and services. It also affects us all directly as petrol and diesel prices rise. As a result, inflation rises. A high inflation is bad for an economy. It also affects companies - directly because of a rise in input costs and indirectly through a fall in consumer demand. This is why the fall in global crude prices comes as a boon to India. 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.
Oil subsidy and fiscal deficit:
The government fixes the price of fuel at a subsidised rate. It then compensates companies for any loss from selling fuel products at lower rates. These losses are called under-recoveries. This adds to the government's total expenditure and leads to a rise in fiscal deficit - the amount it borrows from the markets. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit. However, since diesel was recently deregulated, the fall in oil prices will likely have less effect on the government's fiscal deficit. Moreover, the government still has to pay for previous under-recoveries. Any benefit from the fall will be offset by payments for the past under-recoveries.
Rupee exchange rate:
The value of a free currency like Rupee depends on its demand in the currency market. This is why it depends to a great extent on the current account deficit. A high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee. A fall in oil prices is, thus, good for the rupee. However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.
The fall in global oil prices may be beneficial to India, but it also has its downsides. Directly, it affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world, according to media reports. This helps it earn $60 billion annually. Any fall in oil prices negatively impacts exports. At a time when India is running a trade deficit - high imports and low exports, any fall in exports is bad news. Moreover, a lot of India's trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products. This would indirectly affect India and its companies. For example, the share prices of Bharti Airtel and Bajaj Auto fell because of the devaluation of the Nigerian currency - Naira. Both the companies have a significant presence in the African country.
Indians staying abroad sent $70 billion worth money back home in 2013, according to a report by The Hindu, a national newspaper. This is important because India uses these inflow to fund its current account deficit. Majority of this money comes from Indians staying in Gulf countries. A fall in oil prices could affect some of the oil-exporting Gulf countries. This could in turn affect the flow of money into India.