Crude oil price has been touted as Narendra Modi’s best friend, as for about two-and-a-half years, it helped keep India’s current account deficit, fiscal deficit, and inflation under control.
Most importantly, it gave room to the government to hike taxes on fuel.
But then, oil prices took an upward turn late last year and even touched $80 per barrel mid-May, pressurising the government to not only keep fuel prices in check but also to prevent India’s budget from slipping into the red.
However, under international pressure, oil cartel Organization of the Petroleum Exporting Countries (OPEC) decided to increase oil supply by 1 million barrel per day from July 1. Meanwhile, the United States stockpiles also rose by 5.6 million barrels in the last week of July. Together, it led to a massive 6% fall in Brent crude oil price, and 7% drop in US crude futures in July — the biggest monthly declines for both benchmarks since July 2016, Reuters reported.
Oil analysts expect oil to remain range-bound in coming six months. Barclays has said in a research note that the market is underestimating the spare capacity of oil-producing countries and has estimated oil prices to average about $73 a barrel.
Rising oil prices have a direct upward impact on India’s CAD, given its huge oil import dependence. “However, on the fiscal front, deregulation of petrol and diesel and the asymmetry in the government’s excise duty policy (ie hiking the duty on petroleum products when oil prices were falling and not cutting it when the price is rising) has provided a cushion to the government,” rating agency Crisil said in a report.
“Hence, the subsidy burden does not necessarily rise when oil prices start firming up. This suggests India’s macros – barring CAD – are relatively resilient to a crude oil prices shock, provided it is transitory,” it added. The rating agency said that the there is a sense of comfort as most forecasters expect crude oil to soften from next year on easing global demand and structural shift to non-conventional fuel alternatives.
The government had earlier said that India has the capacity to comfortably handle oil prices up to $60 a barrel, and to bear the shock if it stays at about $68-$70. Oil prices slumping from $77-$80 a barrel to $73 a barrel is good news for India. As a result, petrol prices have fallen by about Rs 2 per litre in two months. Petrol price in Delhi has dropped to Rs 76.31 a litre on Wednesday from a record high of Rs 78.43 touched on May 29. However, oil prices need to moderate further to at least below $70 a barrel for India to be comfortably bear its impact again.