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Thursday, May 28, 2020

Taking the plunge

Lower crude oil prices could reduce India’s import bill, ease inflationary pressures, boost government revenues

By: Editorial | Updated: March 10, 2020 7:12:11 am
stock markets, Sensex, Nifty, crude oil prices, crude oil, BSE Sensex, NSE Nifty, Express Editorial, Indian Express The collapse in oil prices has been more severe.

On Monday, the benchmark stock indices in India suffered their worst single-day fall (in absolute terms), tracking the sell-off in global markets, as crude oil prices crashed owing to disagreements between OPEC and Russia, and fears over the economic fallout of the coronavirus deepened further. The benchmark stock indices fell by over 6 per cent, trimming some of their losses thereafter to end the day down 5.2 per cent. The collapse in oil prices has been more severe. Crude oil prices plunged by around 30 per cent in early trading, ending the day at around $35 per barrel, as Russia disagreed on production cuts to reduce supply as demand falls. According to some forecasts, global oil demand growth in 2020 will be less than 0.48 million barrels per day, down from 1.1 million barrels in December 2019, as the shut-down of factories in China, disruptions in supply chains, and travel restrictions imposed across the world depress demand.

For India, whose macro economic indicators are dependent on crude oil prices to a great extent, the sharp fall in price bodes well on several fronts. First, as India imports around 80 per cent of its oil requirement, the collapse in oil prices will cut the country’s import bill, and soften its current account deficit. According to estimates, a one dollar decrease in crude oil price reduces the oil bill by around $1.6 billion per year. The current account deficit has already become more manageable in recent times, as domestic demand has been sluggish. Second, the fall in crude prices will also help ease inflationary pressures that have been building up over the past few months, though the impact will perhaps be felt more in the wholesale price index (WPI) than the consumer price index (CPI). This will increase the space for the monetary policy committee to ease rates further. The 10 year G-sec yield has already fallen in anticipation, sliding below the 6 per cent mark during the day, recovering thereafter to end at 6.07 per cent.

Third, the collapse in crude oil prices, which comes at a time when concerns have been voiced over the central and state governments’ fiscal position, is likely to help boost government coffers. As in the past, the central and state governments can choose not to pass on the benefits of lower prices to end consumers, and use this opportunity to shore up their revenues. If they do choose to pass on the benefit of lower prices to consumers, it will help boost their purchasing power and stimulate demand. However, while lower oil prices could provide a boost to the flagging economy, it is likely to be offset by disruptions in economic activity due to the coronavirus. The government must carefully assess the situation, monitor the sectors that are likely to be affected the most by disruptions in supply, and craft the necessary policy response.

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