If the crisis in West Asia persists and crude averages $110 in FY12, India’s oil bill will balloon by $20 billion.
There are only two possibilities: Either the government borrows and pays for the increase, or the consumers pay. Analysts expect the government to either pay this $20 billion through government borrowings or make PSU oil companies bear the burden through oil subsidy bonds. This figure is important as it stands for 10 per cent of the expected bank deposit growth in FY12 and three per cent of incremental savings. And if the government chooses to fund this by borrowing, it could well crowd out of the private sector.
However, the cost of rising crude prices will be significantly higher than the estimated $20 billion, believe many others. According to Nomura’s Rob Subbaraman, chief economist, Asia, “If the flare-up in West Asia and North Africa intensifies, the likely further run-up in commodity prices could impart a sinister supply-side shock to much of Asia, hurting growth and exposing vulnerabilities in some countries — notably India, the Philippines and Vietnam.”
The fallout of this crisis could be three-pronged for India. First, India has the maximum exposure to the region as a share of total Asian exports (21.2 per cent). This could well take a hit if crisis persists, however, what worries economists is the sensitivity of food prices to oil prices. Increasingly, food prices have become correlated to oil as production has become more energy-intensive, relying on fertilizers, irrigations systems, cold storage and transportation. If food prices are driven up further, RBI will probably have no choice but to make a trade off between growth and inflation, and increase key rates to curb inflation. Whichever way one looks at, higher crude means a lot more than higher subsidies and government borrowing. The ripple effect of this will be felt by consumers and corporate alike.