Falling rupee & rising oil bill

India’s oil bill is likely to jump by about $ 26 billion in 2018-19 compared to last year when India spent $87.7 billion (Rs 5.65 lakh crore) on importing 220.43 million tonnes of crude oil. This is due to the rupee dropping to a record low, making oil costlier to purchase from the international market. The rupee hit a record low of 70.32 to a US dollar in the opening deal on Thursday. India imports over 80 per cent of its oil needs. Last year, India imported 220.43 (MT) of crude oil while the imports are pegged at almost 227 MT this year. “We at the beginning of the financial year estimated that crude oil import bill will be around $108 billion (Rs 7.02 lakh crore) at an average crude oil price of $65 per barrel and exchange rate of Rs 65 per dollar,” a government official said. The exchange rate has been at an average of Rs 67.6 and if the rupee is to stay around 70 per dollar for the rest of the ongoing fiscal, the oil import bill will be $114 billion, he said. The rupee has witnessed 8.6 per cent slump this year and has been among the worst performing currencies in Asia. The falling rupee has had an adverse effect on India’s trade deficit which in July widened to $18 billion, the most in more than five years. However, exporters, as well as domestic oil producers like ONGC who bill refiners in US dollar terms, will benefit from the rupee depreciation. A rise in petrol, diesel and cooking gas (LPG) prices is likely and the impact would be visible later this month.

While a rise in trade deficit will lead to current account deficit, which has a bearing on the economy’s overall image, the public sector oil companies which import crude oil will end up with an inflated bill. The government which pays a hefty sum of money as subsidy on the import of crude oil will have to pay up more because of the falling value of Indian Rupee vis a vis US Dollar, the preferred currency of payment for most of the import bills. To pay the bill, the government will have to withdraw money from other programmes. And in an election year, the government cannot prune funds allocated to welfare programmes or flagship projects. The rising oil bill put the government in a spot when it will have to rearrange the finances of some key and popular projects. Some part of the excess bill will be passed on to the retail consumers by increasing the prices of petrol, diesel and cooking gas. While any move to increase the fuel prices, which are already touching their record high, will be unpopular, the government’s policy has been that it will not interfere with the price mechanism set for fixing the daily price of petrol and diesel. The situation can snowball into an overall rise in prices of commodities across the country. It is, therefore, handling the effects of rising oil prices on the economy at a time when the falling rupee has compounded the problem calls for immediate and prudent measures.

After a long spell of strict fiscal management, RBI has recently cut the repo rate, making it less expensive for banks to borrow money from the Central bank. RBI reported that the inflation level has been under control and the economy can get a boost if it introduces stimulants such as slashing of the repo rate. In view of the rise in crude oil prices in the international market in the past two years and its impacts in the domestic market, the Central bank feared that the situation can cause the inflation to go up. Meanwhile, India Ratings on Thursday revised down its economic growth forecast for the financial year 2018-19 by two notches to 7.2 per cent citing rising inflationary risks. The rating agency has also revised upwards its inflation forecast despite a likely normal rainfall this year. Despite a likely normal rainfall in 2018, we now expect average retail and wholesale inflation in FY19 to come in at 4.6 per cent and 4.1 per cent, respectively as against 4.3 per cent and 3.4 per cent forecast earlier, the agency said.

When the Narendra Modi government came to power in 2014, the oil prices were at a record low of less than $ 50 a barrel and the rupee was traded at 63 per dollar. In the past four years, the oil prices have risen to nearly $80 and the rupee to 70 per dollar. This has increased the import costs of all products including crude oil. Before the Lok Sabha election next year, the government will be forced to show how it tackles the problems arising out of higher crude oil prices and falling rupee.