Oil's not well: Inflation may not stay in sync with MPC's estimate

Oil shock: Current account deficit may touch 2.5% of GDP next year

Under the compulsion of the ongoing Assembly elections, the government is keeping low the prices of petrol and diesel despite the Ukraine crisis jacking up the global crude oil rates to near $100 a barrel.

However, oil-marketing companies may hike prices after March 10, the day of counting. Alternatively, the government may again slash excise duties on the fuels.

ICRA Chief Economist Aditi Nayar said the primary impact of the Ukraine tensions would be on inflation and the current account deficit (CAD). The impact on inflation will depend on when and by how much retail prices go up and whether excise duty is cut, she added.

“Inflation is unlikely to moderate as sharply as the MPC (Monetary Policy Committee) has projected,” she said, adding, the CAD could rise to 2.5 per cent of GDP if Indian crude oil averaged $100 a barrel in FY23.

The MPC has projected the consumer price index-based inflation rate at 5.3 per cent in 2021-22 with Q4 to witness 5.7 per cent. It estimated the rate at 4.5 per cent for 2022-23.

Bank of Baroda Chief Economist Madan Sabnavis saw global crude oil prices affecting the CPI inflation rate by 0.15 percentage points even if they touched $110. However, combining with the second round impact through costlier food prices, the impact could be 0.3-0.5 percentage points, he said.

The country had a current account surplus of 0.9 per cent of GDP during 2020-21 due to Covid-induced lockdowns.

The impact of the rise in crude oil prices on the Centre’s fiscal deficit may not be much because petroleum subsidies are confined to only gas cylinders for families below a certain income level. LPG subsidies have been estimated at Rs 5,812 crore during FY23 against Rs 6,517 crore in the current financial year.

The presence of companies like Exxon and BP in Russia may also ensure that Indian investment in that country may not face trouble. Companies in India have invested around $13 billion in oil and gas assets in the US. In the case of sanctions, dividend payout from the assets of companies like ONGC Videsh, Indian Oil Corporation, Bharat Petroleum Corporation, and Oil India may be affected, said an industry source.

Oil-marketing companies have not raised petrol and diesel prices in major metro cities since November 4, when the Centre had cut excise duties on diesel by Rs 10 a litre and petrol by Rs 5 a litre on the occasion of Diwali. Only in the case of petrol did Delhi see one more revision on December 2.

Even then, petrol prices are over Rs 100 a litre in Mumbai, Chennai, and Kolkata. Only in Delhi among the metros is the petrol price ruling at below Rs 100 -- Rs 95.41 a litre. Diesel prices are less than Rs 100 a litre in all these metros.

“We have to wait for some more days to get a clear picture on whether there will be any impact on the company. Today our crude oil basket is spread across 25 countries. Even if Russian supplies are affected, we will not face supply issues. On the marketing side, if crude oil goes beyond $100 a barrel, there may be pressure on consumers,” said Vetsa Ramakrishna Gupta, director (finance), Bharat Petroleum Corporation.

A major cause of concern will be the rising crude oil import bill, according to industry experts, if international prices remain at the current level.

The country imported crude oil worth $130.22 billion in the first 10 months of the current fiscal year, more than double the $63.38 billion a year ago. However, it also exported refinery products worth $48.04 billion during April-January FY22, which is almost three times the $19.72 billion during the corresponding period of FY21.

“India’s monthly import bill comes to $11-12 billion. Our LNG imports also remain at elevated levels as much of our LNG contracts are oil-linked. At the prevailing international prices, India’s oil and gas imports put enormous stress on the current account deficit,” said Debasish Mishra, partner at Deloitte Touche Tohmatsu.

Michael Taylor, managing director, Moody’s Investors Service, said: “The global price of oil and liquefied natural gas (LNG) is likely to rise sharply in the event of a conflict, which will be positive for the relatively few exporters in the Asia-Pacific region and negative for the substantially greater number of net energy importers. However, a mitigating factor is that several Asian economies have long-term supply contracts in place for LNG.”