Down nearly 40 per cent since June, international crude prices are close to levels last seen in 2009, when the global economy was gripped by its worst slump since the 1930s. Indians though are not enjoying commensurate savings on fuel bills — retail prices of petrol and diesel are not declining at the same pace as the plummeting price of crude. Consumers are paying 8.32 per cent less for diesel and 11.31 per cent less for petrol than on June 1.
But there are indirect gains. The sharp fall in global crude prices has a favourable impact on India’s macro economy, setting off multiple growth boosters. Investment bank Nomura estimates that the $40 fall can potentially boost growth by up to 0.4 percentage points to 6 per cent in the current financial year. “Improvement in macro fundamentals [inflation and the fiscal deficit and the current account balance] will, at the margin, increase the space for macro [monetary and fiscal] policies to boost growth,” it says in a report on the impact of the tumbling international crude prices on India.
“The price fall is fortunate for the new government … it will reduce the balance of payments and if handled well it can be translated into economic growth,” economist Kirit Parikh told
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The timing of this windfall could not have been better for India’s economy. A new government with a huge mandate is in office and business is on the cusp of an upturn.
The most obvious positive fallout is on price rise. Wholesale inflation growth could slow by around 2 percentage points, Nomura estimates. Consumer prices will ease too, though to a much less extent, it says. The spare cash from fuel cost savings, howsoever small, should increase consumer discretionary spending. Higher consumption adds to corporate incomes. Abating input costs too will widen profit margins for businesses. As balance sheets start improving, companies will be better placed to start new projects or revive stalled ones, generate new jobs and growth.
Just as for companies, the government will be able to mend its balance sheet. The fortuitous oil-price situation released substantial savings on the fuel subsidy bill, which Nomura estimates at 0.1 per cent of the GDP. This has made it possible for the Finance Ministry to increase excise duty rates for petrol and diesel for additional revenue of up to Rs 15,000 crore this year.
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The cushion of extra revenue and subsidy savings will come in very handy for the Centre in keeping its fiscal deficit for this year within the Budget target of 4.1 per cent of the GDP, especially because the Finance Ministry has warned that tax collections will miss the Budget target. More important, the happy oil position has emboldened the Modi government to roll out far-reaching fuel subsidy reforms and clean up the Centre’s account books. The Centre has capped the Budget subsidy on cooking gas and eliminated the one on diesel, freeing its pricing from government control. The diesel subsidy that had amounted to 0.3 per cent of the GDP last year stands scrapped.
Besides the government’s coffers, the public sector oil companies’ profitability could benefit too from these measures.
The third channel through which growth impulses can be expected is India’s external account or the current account deficit (CAD). Since India imports more than 70 per cent of its oil consumption, deflating global crude prices reduces India’s import bill. Nomura estimates that India’s annual CAD could improve by up to $36 billion from the $40 fall. This gives the Reserve Bank some room to add more dollars to India’s forex reserves, allowing the rupee to depreciate, which will make exports more competitive.
How did this window of good luck become available to India and till when will it last?
The remarkable fall in global oil prices is continuing because of a mismatch in demand and supply. Demand is down because of eurozone’s economic stagnation, Japan’s slipping into recession and China’s slowdown. Output, on the other hand, is rising on account of the U.S. shale boom.
The downward trend in global crude is expected to sustain after Saudi Arabia led the oil producers of OPEC last fortnight to decide against cutting their output target of 30 million barrels a day.
After the first global oil shock following the 1973 Middle East War, Saudi Arabia, the ultra-low-cost producer of oil, has influenced geopolitics at will by turning the taps on and off.
It is again playing politics with oil to force down the price with three objectives: of hurting Iran and Russia’s oil incomes and rendering the U.S. shale production unviable. The threat from the shale project to the oil producers being that the U.S. is projected to become a net petroleum exporter before 2020.
Saudi Arabia also wants to counter the attempts of the Rouhani regime in Iran at dominating the Middle East region.
Already falling oil prices have driven down Russia’s rouble by 35 per cent since June, shrinking its economy to the size of Spain’s. The vulnerability of U.S. shale, however, is still unclear with several estimates showing it will remain profitable even at crude levels far below $50 a barrel. Post-OPEC’s decision, crude prices are ruling at about $68 a barrel, at which level, Saudi Arabia believes, U.S. shale will become unviable.
Still, how long Saudi Arabia will manage to hold prices down is anybody’s guess. Projections vary from a few months to two years.
The only foreseeable downside to the emerging oil story for India comes from the fact there is a huge non-resident Indian presence in the Gulf. Their incomes could be affected if these oil-producing countries are hit. This will depress remittances from them to India.
On Tuesday, Reserve Bank Governor Raghuram Rajan became one of the first worldwide to caution against the possibility of a reversal in the downward trend in global crude and prices rising on the back of geopolitical risks. Just when this can be expected the Governor did not say. For India’s economy, which the Governor has projected will begin to revive in 2015, the oil-price relief window’s timing could not have been sweeter.