Crude Oil Price has a direct and indirect correlation with India’s economy (Oil Price & India’s Economy)

In recent times we saw how crude prices, that is Brent and Nymex prices went up. And this had an impact on the Indian economy. So, what exactly is the relation between Crude oil price hikes and the Indian economy?

80% of the demand of crude oil in India is fulfilled through imports of crude oil. For example, if we are consuming 100 barrels of crude oil, then we are importing 80 of those barrels from outside. This means that there is only 20% production of crude oil done through our domestic facilities. So, we have a huge demand from the foreign markets. And that is why it is impacting our import bill on such a large scale. And because of high import bill, we can see its effect on higher prices, What is Fiscal Deficit, current account deficit and other things.

Crude Oil Impacts on: –

• Current Account Deficit (CAD) –
  • CAD = Imports – Exports
  • If imports are more than exports, then we can see a Current Account Deficit.
  • For calculation of this, the average price taken by the Finance Ministry was $65 per barrel.
  • After May-June, the Brent oil price went up to $80 per barrel. So, this $20 per barrel had a impact for a few months.
  • So, on average basis, we were incurring $10 per dollar of extra cost, which had an effect on the CAD of 43 bps. That is our CAD was increasing by 0.43%. This amounted to an extra bill of $12.5 billion.
  • Thus, as our CAD was increasing, INR was depreciating in comparison with other foreign currencies.

Government Response – To tackle this and control the increasing CAD, the government passed on the price hike in crude to the consumers. When consumers are getting the impact of increased price, then the result of that is higher inflation.

• Inflation
  • When inflation is high, automatically interest rates are also on the higher side. When the interest rates go up, profitability of companies comes down. Thus, it will have an negative impact on the corporate profitability.
  • One can see how all this is a vicious circle.

And for the next 10-15 years, we are completely going to be dependent on the crude oil prices. The reason is that we still do not alternative energy resources on which the vehicles be able to run. Though there are many R&D done for this, electric cars coming in to picture, new policies been made; but still it will need more 10-15 years to replace crude oil.

• What is Fiscal Deficit
  • What is Fiscal Deficit is nothing but the earnings government is earning through taxes (direct & indirect) and the expenditure government is going to incur.
  • So, when earnings are less than the expenditure budgets, then we have a Fiscal Deficit situation.
  • If the government decides to not pass on the crude oil price hikes to the consumer, then they will not increase the petrol or diesel prices. In a way, the government is taking the hit on its own balance sheet. And that’s how the fiscal deficit grows.
  • Growing What is Fiscal Deficit is also not good for the economy. When the fiscal deficit goes up, then chances are that the rating of Indian economy may go down and because of that the corporates (companies) will not be able to borrow from the outside world at a lesser cost. This in turn will again have a negative impact on the Indian economy.

Summary

• Thus, Current Account Deficit (CAD), Inflation and Fiscal Deficit are very important factors.
• The crude oil prices will always have its impact on these three factors.
• Balancing out all the above-mentioned factors is a tough job the government will always have to do to manage the economy.
• This will not be the case if we are not dependent on crude oil.
• Until then, Indian economy will keep getting impacted whenever the crude oil prices rise.

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