Coal shortage, rising fuel prices may hit manufacturing activity: Economists

Coal shortage, rising fuel prices may hit manufacturing activity: Economists

Economists estimate an up to 1 percentage point increase in overall inflation.

The country is facing its worst ever coal crisis with fuel stocks at power stations at alarmingly low levels. The country is facing its worst ever coal crisis with fuel stocks at power stations at alarmingly low levels.

Sustained domestic coal shortage and rising international crude oil prices could adversely impact economic outlook, with the manufacturing sector expected to be hit due to power supply constraints, economists caution. There is also fear that an estimated increase in overall inflation by up to 1 percentage points due to the twin factors-coal shortage and rising fuel prices-could likely dampen demand.

The rising import bill on account of fuel is also expected to widen the current account deficit to nearly 1 per cent of GDP in FY22, compared with a surplus of 0.9 per cent of GDP in the previous fiscal.

The country is facing its worst ever coal crisis with fuel stocks at power stations at alarmingly low levels. While low coal stocks during monsoon months is normal, this year the average coal stock at monitored plants remains at four days as against a norm of two weeks. Meanwhile, Brent crude price has touched a decade high level of $80 per barrel.

Also Read: Govt notifies 100% FDI via automatic route in telecom sector

Devendra Kumar Pant, chief economist, India Ratings points out that there will be an impact on production and overall economic growth outlook for the current fiscal if coal shortage continues for a longer period. The high global prices of two key energy sources-coal and crude-may delay consumption demand revival in the economy.  
"Direct impact of high prices will be felt on government and consumers and could result in delaying consumption demand revival," Pant said.

India's GDP grew by 20.1 per cent in the April-June quarter of 2021-22 year-on-year, but was 9.2 per cent lower than the level attained in the first quarter of 2019-20.

Private final consumption expenditure, which denotes demand, grew by 19.3 per cent in Q1 year-on-year, but is nearly 12 per cent lower than the levels in Q1 of 2019-20.

Pronab Sen, former chief statistician of India, is of the view that the coal shortage may eventually have an impact on the manufacturing sector, which has recently started picking up. He said that a call will have to be taken on rationing of power supply. "Basically, how much for industry and how much for households. If the burden of power shortage falls on the industry, then it will impact the production and hit economic growth going forward. The extent of that is difficult to assess at this point," said Sen, who is currently the country director of the economic research organisation, International Growth Centre.

Aditi Nayar, chief economist, ICRA said that the coal shortage will affect electricity growth and "we need to watch whether and for how long it constrains manufacturing in the economy."

Meanwhile, petrol and diesel prices were hiked for the second straight day on Wednesday. The state-owned oil marketing companies (OMCs) increased the price of diesel by 34 to 37 paise per litre, while diesel became expensive by 26 to 30 paise per litre across the country.

Also Read: Explainer: Why Oil prices are at a 7-year high. All you need to know

Madan Sabnavis, chief economist, CARE Ratings expects inflation to go up in the coming months, even as food inflation would cool. "If crude oil touches $90 per barrel, the wholesale price index-based inflation will go up by 0.96 percentage points and consumer price index-based inflation by 0.63 percentage points," he said.

The Reserve Bank of India (RBI) panel raised the inflation forecast for the current fiscal to 5.7 per cent from 5.1 per cent earlier. It is quite close to its upper tolerance limit in the 2-6 per cent band.

The Monetary Policy Committee (MPC) had called for a reduction in taxes and duties imposed on petrol and diesel by central and state governments in June. However, while the Centre has not budged yet, Tamil Nadu had cut tax on petrol by Rs 3 per litre in August.

"From manufacturing sector's perspective, we remain watchful of the brewing concerns from the global energy crisis and its impact on domestic coal shortages, possible albeit minor spillovers from China's credit market and the deceleration in domestic auto production amidst semi-conductor shortages," said Yuvika Singhal, economist, QuantEco.

Most economists are expecting a larger current account deficit (CAD) in FY22. "Seeing the September trade deficit, we now expect a larger current account deficit in FY22, although it will remain under 1 per cent of the GDP," said Nayar of ICRA.

Sabnavis of CARE Ratings expects CAD to be at 1 per cent of GDP in the current fiscal compared to a surplus of 0.9 per cent of GDP in FY20.

CAD is the gap between the country's overall foreign receipts and payments. The current account deficit is usually financed by a capital account surplus. However, since the last quarter of 2019-20, India has been experiencing a current account surplus along with robust capital inflows leading to a balance of payment (BoP) surplus.

Also Read: PVR expects business to bounce back by year-end