Crude fact: How oil could end up spoiling India’s growth prospects

NEWDELHI: The Economic Survey has cautioned that its projection of 7–7.5% growth for the country in 2018-19 could come down because of rising oil prices.

The caution is that rising oil prices could spoil the fiscal mathematics, built on expenditures on subsidies and revenue earned from taxes on petro products, among other things.

Chief economic advisor, Arvind Subramanian’s short-term outlook on the Indian economy warns against risks from “consumption being hit by oil prices”, and said that India’s policy agenda also needs to look out for “pressures from oil prices”.

The fear around oil prices is palpable as Brent crude is breaching $71 per barrel mark, making it a four-year high.

India imports 82% of its oil needs and the survey shows that every $10 increase in crude prices reduces growth by 0.2-0.3 percentage points, increases WPI inflation by about 1.7 percentage points and worsens the current account deficit by about $9-10 billion dollars.

The downward spiral of crude since the end of 2014 had reduced India’s oil import bill from $112 billion in 2014-15 to $64 billion in the last fiscal. This in turn helped the government trim its current account deficit, the gap between the country’s imports and exports.

Add to this the political strain that rising crude prices have on the government. Increasing prices of motor fuel, subsidised and non-subsidised LPG cylinders had forced the government to cut excise duty by ₹2/litre in October 2017 to calm protests across the country. The cut is likely dent the exchequer by ₹13,000 crore for the remaining months of the fiscal.

Another duty cut would strain the exchequer, as chorus for it is already rising, with petrol prices touching ₹72.84 per litre in Delhi and breaching ₹80 in Mumbai.

“We expect growth to be around the lower end of the band as higher oil prices are likely to take away some part of growth,” said Anis Chakravarty, lead economist and partner, Deloitte India.