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Why oil price crash is good for Indian economy

The overnight collapse of oil prices by 25 per cent after Saudi Arabia shocked the market by launching a price war against its earlier ally Russia can be good news for the Indian government facing a widening fiscal deficit

twitter-logoNevin John | March 9, 2020 | Updated 15:52 IST
Why oil price crash is good for Indian economy
Indian Govt migh gain from drop in oil prices

The overnight collapse of oil prices by 25 per cent after Saudi Arabia shocked the market by launching a price war against its earlier ally Russia, gives a lot of hope for India government, which has recently witnessed its fiscal deficit widening because of the low economic activity and delay in the disinvestment plan. West Texas Intermediate and Brent crudes lost about a fifth of its value in the morning Asian trade, to about $32 a barrel and about $33 a barrel, respectively. Both oil contracts are on track for their worst day since 1991.

The fall is a breather for the India government, which is facing lower than expected GST collections. Cheaper crude reduces India's foreign currency outflow and inflationary pressures, besides reviving economic activity. The lower prices reduce pressure on inflation and interest rates and revive economic activity. Passenger vehicle sales, which were falling during the UPA-2 government, bounced back and increased over 30 per cent between 2015 and 2018. Two-wheeler sales rose 35 per cent, according to SIAM data.

However, the sharp fall of Indian rupee against the US dollar, when more cases of the coronavirus were reported in the country, can play a spoilsport in the crude gain as it would appreciate the import costs. The exit of foreign institutional investors (FIIs) from the stock market is also not a good sign, which can hamper the crude bonanza, as it will hurt the economic activity.

The last time crude exceeded $100 a barrel was in September 2014, soon after the Modi-led government was formed. But, it then slumped to $27 by January 2016, providing a fiscal cushion to the government. Though the recent falls in crude prices have been sharp, the same is not the case with petrol and diesel prices, which have fallen lesser than the crude prices.

The lower fuel prices will boost consumer spending and government's income from excise duty. At the macro level, it impacts the fiscal deficit, external borrowings and debt position, according to an analyst with a foreign bank. Credit rating agencies earlier said higher oil prices add to short-term fiscal pressures, which would follow cuts in the GST on some items and relatively high increases in minimum support prices for crops. It results in the risk of higher fiscal deficit.

Finance Minister Nirmala Sitharaman in her Budget 2020 speech proposed reducing fiscal deficit by 30 basis points to 3.5% of GDP in 2020-21. Moody's Investors Service in February said the Indian government will face challenges in achieving its fiscal deficit target amid persistent structural and cyclical headwinds to growth.

The sharp fall in oil prices has resulted in a stronger rupee. This, along with falling oil prices, should contain India's burgeoning current account deficit (CAD; the difference between inflow and outflow of foreign currency).

Since India imports about 82 per cent of required crude - which cost $87 billion in 2018/19- lower oil prices benefit the government. The petrol price was cut by 24 paise a litre today while diesel price dropped by 25 paise, said reports. The price of petrol reduced by Rs 4.55 a litre and diesel by Rs 4.7 a litre in five consecutive days of fuel rate cut. The petrol is selling at Rs 76.29 per litre and diesel at Rs 66.24 per litre in Mumbai.

Also read: Oil prices may see biggest fall in four years

Also read: Non-subsidised LPG price reduced by Rs 53; check new rates here

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