Collapse of oil economies may affect India

Updated - April 01, 2016 09:13 pm IST

Published - January 08, 2015 11:49 pm IST - MUMBAI:

The continued slide in Brent crude prices augurs well for the Indian economy despite the temporary setback for stock markets and oil related stocks. However, analysts believe that the collapse of some oil economies could be a matter of concern for India.

“The fall in the stock markets was due to a combination of fall in crude oil prices below the $50-mark as well as the possibility of Greece being taken out of the eurozone. Falling crude oil prices is symptomatic not just of excess supply but also falling demand,” said Rajesh Mokashi, Deputy Managing Director, CARE Ratings.

The fall in crude oil price is good for all users, including major importers like India, as it lowers their trade deficit and hence strengthens their currencies. However, for the oil exporters, this is bad news as it lowers their export earnings, and given that most countries are dependent on oil exports, their growth would suffer.

“With low oil price, our production cost will go down, and we will be competitive internationally. With this, our exports will increase. Our imports will be down and this will improve our balance of payment situation. Overall it is good for our economy,” said Pramit Brahmabhatt, CEO, Veracity Group.

“The collapse of any economy will be a concern for India as it changes economic dynamics. Today the global economy is just about in a recovery mode and the collapse of any economy, be it Greece or any oil producing country would change the policy actions of central banks which will influence the flow of funds thus impacting our external balances. Hence while we may not be affected on the trade front, it will definitely impact our balance of payments,” Mr Mokashi added.

Now analysts are looking Brent at between $35 and $40 a barrel where the rate will equal the marginal cost of producing oil.

The steep fall in crude prices is defacto fiscal stimulus for India as oil accounts for 37 per cent of its imports. Lower oil prices will cut inflation, and will bring down our current account deficit. It will boost our growth prospects and overall it is good for India. However, there should not be any geopolitical imbalances that could affect FDI or FII fund flow into India due to low crude prices. Default in loans given to Russia and to shale gas developers in the U.S. could affect the global banking industry which could cause imbalances,” said Ajit Ranade, Chief Economist, Aditya Birla Group.

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