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What do higher oil prices mean for India?

Considering India is a net oil importer with inelastic demand, movement in global crude oil prices tend to have an important bearing on the macro stability risks

Tanvee Gupta Jain 

Oil demand, the report says, is slowing down, but it will not be reversed before 2040
Oil demand, the report says, is slowing down, but it will not be reversed before 2040

have slipped from the two-year highs hit last week by both crude benchmarks on signs that US supply is rising and could potentially undermine OPEC's efforts to tighten the market. This author discusses the macro sensitivity of India to movement in global crude


Brent crude have continued to recover and are now exceeding US$60/bbl. This is up about 35% from this year's low, and 10% above our 2018 forecast of US$55/bbl. According to our global oil team, have responded to: 1) the drop in global oil inventories, with the US alone having shed about 80m barrels since the peak reached in March 2017; 2) expectations for an extension of OPEC production cuts; and 3) a stagnant and modestly falling rig count.

Oil price moving up—when does it start hurting India? 

Considering India is a net oil importer with inelastic demand, movement in global crude tend to have an important bearing on the macro stability risks (inflation, current account deficit [CAD] and fiscal deficit) and hence economic growth prospects. If the Brent price averages around US$60/bbl in FY18 (versus US$55/bbl UBS estimate), the macro stability risks will widen but will still be manageable. The Monetary Policy Committee (MPC) would prefer to go in for a prolonged pause (versus scope of one more 25bp rate cut priced in as per our base case, assuming a stable fiscal position). However, strengthening in above US$70-75/bbl could lead to terms of trade shock and could have a significant impact on growth, inflation, CAD and fiscal balance. In such a scenario, there is a risk of further tightening in policy rates. Let's discuss the macro sensitivity of India to movement in global crude

a) Oil imports and current account deficit (CAD) 

India imports 82% of its oil requirements and net oil imports stood at US$56bn (2.5% of GDP) as of FY17. According to PPAC (Petroleum Planning & Analysis Cell), a US$10/bbl rise in increases India’s import bill and, hence, CAD by US$8bn (0.3% of GDP).

b) Oil subsidy, excise duty and fiscal balance 

India’s gross under-recoveries in oil have narrowed to around US$3bn (0.12% of GDP) in FY17 from the peak of US$30bn (1.6% of GDP) registered in FY13, due to a sharp fall in global crude and energy sector reforms that helped lower the subsidy burden. Measures undertaken by the government include the deregulation of prices, modest monthly increases in kerosene and LPG cylinders prices, allocation and distribution reforms (eg, direct benefit transfer), among others. At the same time, frequent hikes in the excise duty on gasoline and have boosted the government’s revenue collection but reduced the direct gains to consumers from lower crude However, this is now reversing as have begun moving up. According to PPAC, a US$10/bbl increase in global crude oil price increases India’s fuel oil subsidy by about US$2bn (0.08% of GDP) if domestic fuel prices are unchanged (assuming USD/INR remains stable). Correspondingly, every Rs1/litre cut in excise duty reduces government’s revenue collections by US$2bn (0.1% of GDP).

c) Inflation 

and have a combined weight of 2.3% in the CPI basket. A 10% rise in crude could increase CPI inflation by around 25bp, if the government were to pass the full increase to consumers (a cascading impact of a similar magnitude would also be felt). A possible excise duty cut in and to provide relief to consumers in lieu of higher might help soften the impact on inflation. 

d) Private consumption and growth 

A 10% increase in average crude would result in a 30bp dent in GDP growth if the full cost were passed on to consumers (RBI’s estimates). However, the impact would be non-linear of a subsequent increase in  

The author is an Economist at UBS Securities India Pvt. Ltd


Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

First Published: Fri, November 17 2017. 09:12 IST
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