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6 effects of rising crude oil prices on the Indian economy
Why is everyone so concerned about crude oil prices all of a sudden? That’s because the global crude oil prices have been steadily rising over the past few months. For the first time since 2014, the international benchmark for global oil prices crossed the $80/barrel mark in May 2018 . Compare this to the $29/barrel price during early 2016! This sudden surge in prices has a great impact on various segments of the Indian economy. Let’s have a look:
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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. To know more, click here.
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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.
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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.
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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.
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Impact on stocks:
A lot of Indian companies depend on healthy crude oil prices. This includes tyre, 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.
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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%).
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3,000,000
India imports 3 million barrels of crude oil per day. This is a huge quantity of crude oil import. A rise in crude oil prices by $10 per barrel could lead to an increase of $2.5 billion (or Rs 17,000 crore) in fuel subsidies, according to a report by Livemint.
