How falling crude prices affect India

September 11, 2014

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

Brent crude prices have dropped below $100 a barrel, causing anxiety within the Organization of the Petroleum Exporting Countries (OPEC) and giving some relief to India and China. The market is bearish at present but the future is unpredictable.

A gas pump is seen hanging from the ceiling at a petrol station in Seoul June 27, 2011. REUTERS/Jo Yong-Hak/Files The fall in prices is largely due to subdued demand by consumers and oversupply by some OPEC producers. An added reason is the increase in U.S. production from shale. The next OPEC meeting to review oil supplies is in November but an early decision on quotas cannot be ruled out.

Oil is critical for India. For one, India imports more than two- thirds of its requirement, which constitutes 37 percent of total imports. A one-dollar fall in the price of oil saves the country about 40 billion rupees. That has a three-fold effect spread across the economy.

First, if the average fall in oil prices is about $4 per barrel in 2014-15, the trade deficit will shrink by about $3 billion. In the April-June quarter, the current account deficit had dropped to $7.5 billion, mainly due to customs duty on gold imports. Add to that the fall in oil prices and the current account deficit should come down further and harden the rupee against the dollar.

Second, the fall in international oil prices will reduce subsidies that help sustain the domestic prices of oil products. Petrol prices are already decontrolled. The more commonly used diesel has been subject to staggered deregulation since September 2012.

In September this year, the difference between domestic and international prices of diesel will be only 8 paise per litre, which can make diesel eligible for deregulation in about a month.

It is kerosene and liquefied petroleum gas (LPG) that are still heavily subsidized. And looking at the mood of the government, they are unlikely to be market-priced in the near future. The total subsidy on petroleum products in 2013-14 was 854 billion rupees and it will be reduced to the extent the international price of crude declines. The advantage will accrue mainly to the government and oil-producing companies such as ONGC and OIL. Consequently, the fiscal deficit that in 2014-15 is projected at 4.1 percent of GDP may be somewhat reduced.

Third, the fall in international prices of oil will have a soothing effect on inflation. But it won’t be strong enough because the consumption of oil in industry is not that high except in the manufacture of certain products like carbon black.

It is possible that the fall in the price of oil will adversely affect the budgets of many OPEC members and there will be pressure to cut supplies even before the November meeting. It is also possible that demand for oil may recover with the onset of winter and prices may crawl up. Hence, an uptick in prices is possible in the last quarter of the current year. It would therefore be prudent to take maximum advantage from the current fall in prices.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/