Crude oil is one of the most necessitated commodities across the globe and it serves as not only a vital source of energy but also a chief raw material for several industries. Therefore, crude oil prices have a significant impact on the economic growth of any country. High crude oil prices adversely affect the twin deficits of an economy – the current and fiscal account deficit, which further exerts a spillover impact on the consumption, investment behavior and monetary policy of an economy. While oil-exporting nations benefit from surging oil prices, the oil importing countries face higher crude oil import bills that subsequently affect government finances unfavorably. With no significant discoveries or extractions in recent years, the growing production costs have pushed up the prices of crude oil globally. The recent rise in crude oil prices has drawn attention toward the crucial role played by oil exports and imports in any country. Countries that are affected by a hike in oil prices are usually characterized by high net imports of crude oil per GDP. Conventionally, the non-oil producing emerging nations fall under this category as the developed countries are generally more economical in their oil usage and witness an easing of this adverse effect of a rise in prices.

What does the increase in global crude oil price mean for Indian economy?

India, which is posing a double-digit economic growth by certain measures is at present one of the most coveted countries for crude oil exporters among the top five global oil importers including, the U.S., China, India, Japan, and South Korea. India, being the third largest oil importer in the world is one of the most affected economies because of the surging oil prices in the recent months, as the increasing price results in risking reduced current projection for vigorous economic growth, widening the country’s trade deficit and putting more upside pressure on inflation, thereby threatening to exceed the government targets. All this is taking place while the Indian citizens and politicians are about to face a series of upcoming elections in this year as well as the next, with a general election anticipated to be held in 2019 spring. Furthermore, the vast crude oil imports of India results in the spending of huge amounts of foreign exchange. Thus, the rising quantum of import of petroleum products has a substantial impact on the Indian economy, particularly when oil prices are shooting up globally.

Global crude oil prices have been at a steady rise over the past few months. Since 2014, for the first time, the international benchmark for the global oil prices have exceeded the $80/barrel mark in May 2018. The oil prices have witnessed a steep hike in the global market lately, bolstered strongly by a combination of steady demand supply cut by the major oil producers led by the Organisation of the Petroleum Exporting Countries (OPEC) and the fears of American sanctions against Iran. High oil prices push up rates for diesel and petrol in the country, pose a serious threat to the government finances, induce inflation and boost public demand for subsidies and fuel tax cuts. This rise in prices could exert a great impact on several segments of the Indian economy, for instance:

• Impact on Fiscal Deficit: India imports approximately 1.5 billion barrels of crude oil every year which comes up to more than 85% of its annual crude oil requirement. Thus, the hike in oil prices could increase the country’s expenditure, negatively impacting its fiscal deficit, that is, the difference between the total revenue and expenditure of the government, and, a rise in this deficit impacts the economy as well as its markets adversely.
• Impact on Current Account Deficit: India’s dependence on crude on imports have been on a rise over the past years and this has a huge impact on the current account deficit. CAD essentially indicates the amount India owes in foreign currency and a widening CAD further puts pressure on the Indian currency’s value as well on the rest of the economy. A report from SBI suggests India’s current account deficit could exceed 2.5% of GDP for the financial year 2018, provided the oil price continues at $80/barrel.
• Impact of the Indian Currency: The rise in crude oil price clearly impact the Indian currency or Rupee by depreciating it. The Rupee has been depreciating since the onset of 2018 and it hit its lowest against the U.S. dollar in the last 15 months, in May 2018. Currency depreciation has a reverberating effect on the economy as well as the stock market and if oil prices remain this steep, the Rupee is expected to further depreciate by the year-end
• Impact on Sensex and Stock: The stock markets in India is facing a lot of pressure with the hike in crude oil process. The Sensex fell by 2.3% between 1^st and 24^th May 2018 alone. There has also been a sell-off in mid and small cap stocks, with oil prices touching $80/barrel. Further, several Indian companies such as lubricants, airline, refining, tyre and footwear companies are dependent on healthy crude oil prices. Higher input costs adversely affect the profitability of these companies and this could negatively impact stock prices in the near term.
• Impact on Inflation: Oil is a very important commodity in any economy, required to meet the domestic fuel needs and is a necessary raw material across various industries. Thus, an increase in crude oil price implies an increased cost of goods production. This rise in price would be finally passed on to the end-users, subsequently resulting in inflation. Experts opine that a surge of $10/barrel in oil prices is capable of raising inflation by 0.1%.

The net trade oil deficit in India has considerably widened and this can be attributed to high oil prices and a weak rupee. The crude oil import bill of India swelled by a quarter in the FY 2017-2018 from $70 billion in the previous fiscal year as the prices rose steeply, as per the ministry’s petroleum planning and analysis cell. The average price of Indian basket crude rose up 19% at $56.4/barrel in FY 2017-18 from $47.6 in 2016-17. Owing to India’s heavy reliance on imported crude oil, the impact of surging oil prices has resulted in a substantial increase in the oil import bill for the country. The petroleum and natural gas ministry has estimated that India’s crude oil import bill might increase 20% to $105 billion in this financial year from $88 billion in 2017-18, assuming the average crude oil price as $65/barrel for the year.

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