The sharp slump in crude oil prices offers a silver lining to the Indian economy otherwise battered by a spate of negative factors as it helps ease pressure on the current account deficit and enables the government to improve its fiscal health if it is able to raise duties.
In the biggest slump since the 1991 Gulf War, crude oil prices fell as much as 33 per cent between Friday and Monday and hit a level of $33 per barrel — as Saudi Arabia and Russia signalled they would hike output despite sliding demand globally. Saudi Arabia has cut its official selling prices for April for all crude grades to all destinations by between $6 and $8 a barrel, reigniting a price war among major oil-producing nations.
Saudi Arabia’s decision came after the collapse of the OPEC supply cut agreement with Russia last week which ended more than three years of co-operation to support the market.
Amid all the domestic concern around decline in GDP growth and the impact of coronavirus on global economic activity, the fall in the prices of crude augurs well for the economy as India imports more than 80% of its oil requirements.
Two leading corporate voices suggested that the fall in oil prices can act as stimulus and recommended certain steps that the government could take to capitalise on the same.
Anand Mahindra, chairman, Mahindra Group said in a tweet Monday, “So this is what a global meltdown feels like. For India, its a crisis we must not waste. Three opportunities we need to leverage: a) The government can use low oil prices to spur consumption but also retain some of the windfall gains to tackle the deficit. b) Step up sanitisation and the swachh movement which will make India appealing to tourists looking for alternatives to China. c) Step up our incentives and step down regulations for global investors who will now look for alternative manufacturing sites to China.”
On Sunday, Uday Kotak, CEO Kotak Mahindra Bank, said in a tweet: “Amidst turbulence and the virus, some good news – oil at $45/ barrel. Recent $20 drop saves India $30 billion per annum. Also global interest rates have collapsed making money cheap. Let’s leverage these for policy to boost growth.”
According to a report by Care Ratings, in the current financial year India has imported 4.5 million barrels per day (April-January) of crude oil and the import dependency based on consumption has increased to 85 per cent as compared with it being 83.5 per cent a year ago in the same period.
While a decline in crude oil prices also brings inflation to lower levels, the report said, “With imports of 1651 million (4.5*366) barrels of crude oil in FY20 (till January) a dollar decrease in prices on a permanent basis would decrease the bill by roughly $1.6 billion per annum.
Crude oil import bill during FY19 was around $112 billion and in the current fiscal is $87.7 billion (until January). Thus the fall in crude oil prices will further aid in softening the deficit and moderating inflation.
However, the fall in crude oil prices also brings some concern. “Oil remaining below $40/barrel on a sustained basis might lead to a global recession and not good for the markets. It reduces FDI, portfolio investment and even remittances,” says Debasish Mishra, Partner at Deloitte India.
Following a sharp decline in crude oil prices and decrease in trade from China and other countries in the wake of fear of spread of coronavirus, India’s foreign exchange reserves jumped $5.4 billion in the week ended February 28 to hit a new all-time high of $481.5 billion. The country’s forex reserves have grown by $53 billion since September 20 when the government cut corporate tax rate to attract domestic and foreign investment.
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