Falling oil prices bring relief to India’s fiscal and current account deficits

With crude oil prices now cooling amidst the interim peace deal between the US and Iran, India is hopeful that there will be some easing of its worries on the economic front.

According to senior government sources, there is an expectation that the pressure on the fiscal and current account deficits will ease to some extent, although inflation will continue to rise. However, sources have underlined that economic growth for now remains robust and seems not to have been impacted much by the West Asia war for now.

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“There continues to be pressure on both the current account and the fiscal deficits, but it may not be as bad as was being foreseen initially. There will be pressure on financing the CAD, and the fiscal deficit may also overshoot the target of 4.3% of the GDP, but it is likely that with oil prices falling, these would not be as challenging as was being seen during the midst of the war,” sources said.

Inflation, however, will continue to harden in the coming months due to the pass-through of higher oil prices as well as the base effect, but is likely to remain under the Reserve Bank of India’s upper tolerance limit of 6%, they added, but noted that the progress of the monsoon rains will be critical for food inflation.

The government is likely to review the fiscal math in the next three to four months and is likely to provide its revised estimate on growth and other macroeconomic parameters by the year-end, sources said.

“The surge in oil prices has been the biggest negative for the economy this fiscal. While prices have now eased and are back within tolerable limits, there will be some negative impact on the economy this fiscal,” sources pointed out.

In June, the average price of the Indian basket of crude oil cooled to $88.14 per barrel from $106.23 per barrel in May and $114.48 per barrel in April. Meanwhile, international prices of urea have also fallen significantly. These would lead to some easing of pressure on the fiscal deficit, which is still likely to overshoot the target, but the quantum may be lesser. Similarly, the CAD is seen to be closer to 2% of the GDP this fiscal, but lower oil prices could lead to some easing on this front as well.