Thursday, April, 26, 2018
  • Nation
  • World
  • States
  • Cities
  • Business
  • Sport
    • IPL
  • Entertainment
  • Galleries
  • Videos
  • Life Style
  • Specials
  • Opinions
  • All Sections  
    States Tamil Nadu Kerala Karnataka Andhra Pradesh Telangana Odisha
    Cities Chennai DelhiBengaluru Hyderabad Kochi Thiruvananthapuram
    Nation World Business Sport Cricket Football Tennis Other Education
    Entertainment English Hindi Kannada Malayalam Tamil Telugu Review Galleries Videos
    Auto Life style Tech Health Travel Food Books Spirituality
    Opinions Editorials Ask Prabhu Columns Prabhu Chawla T J S George S Gurumurthy Ravi Shankar Shankkar Aiyar Shampa Dhar-Kamath Karamatullah K Ghori
    Today's Paper Edex Indulge Event Xpress Magazine The Sunday Standard E-paper
Home Business

Will economy buckle under crude oil shock in 2018?

By Jonathan Ananda  |  Express News Service  |   Published: 14th January 2018 12:24 AM  |  

Last Updated: 14th January 2018 08:25 AM  |   A+A A-   |  

0

Share Via Email

 NEW DELHI: After three years in the goldilocks zone, India’s economy is back to confronting its biggest bogeyman: rude crude. Brent crude prices are now teasing the $70 per barrel mark — even breaching the line a little while on Thursday.

Over the last half year, Brent crude rates have risen by 55.78 per cent — between June 22 ($44.82) and January 12 ($69.82) —  and bullish price trends are being fuelled by several factors. Geopolitics is one, according to former ambassador to Syria and Turkey Rajendra Abhyankar. Internal power shifts in Saudi Arabia and recent pro-Saudi US moves have upset the power balance, making markets jittery. More recently, the increased cohesiveness of the OPEC cartel and consequent commitments to production cuts; coupled with increased winter demand has sustained the rally.

But, even pessimistic forecasts see this as transitory, not lasting more than a year. “We should not get carried away that $70 will be the new normal..,” Madan Sabnavis, chief economist, CARE Ratings said. On the downside, CARE believes that the rally will continue “till March for certain” when winter demand will ease and the US shale industry’s production plans become clear.  “The only relief in the foreseeable future could be if US production picks up even more,” it noted.

Even a short term rally is unlikely to be pleasant for an oil-guzzler like India. India is the world’s third largest oil consumer, importing around 4.2 million barrels a day and upwards of 80 per cent of its oil needs.

When Prime Minister Narendra Modi came to power in May 2014, crude prices were around $110 a barrel. In less than a year, that had fallen to $50 (January 28, 2015) and has since stayed largely within the $45-$60 range.

Gains from this fall were huge: reducing the import bill, strengthening the rupee and giving space for public expenditure. While a third of the benefit was passed along to consumers, the government channeled a large portion via hiked excise duties into public investment and reducing the fiscal deficit. “... the benefit was between 1 to 1.5 per cent of GDP growth,” says economist Ajit Ranade. But now, that position is being threatened.

“Firstly, the fiscal space will shrink, and oil subsidy burden will increase (even with substantial deregulation). Secondly, there will be an inflationary impact, possibly by as much as 0.5 per cent. Thirdly, the current account deficit will expand, causing the rupee to weaken... And, with higher inflation, the scope for cuts in rates is gone.” Sabnavis believes a dollar increase in prices on a permanent basis would increase the import bill “by roughly Rs 10,000 crore on an annual basis”.

The government may be more worried about inflation. Estimates say retail inflation as measured by the CPI could see a 0.35 per cent rise for every 10 per cent increase in crude rates.

With this year scheduled to see several politically significant state elections and the Lok Sabha polls just around the corner in 2019, the government is unlikely to let retail consumers take the brunt of sharp broad-based inflation. Letting inflation accelerate will also clamp down on rate cuts by the RBI, says Jaijit Bhattacharya, head- economic, regulatory and policy advisory at KPMG. If the number crosses six per cent, the RBI might begin hiking rates, Sabnavis adds.

A higher rate regime would directly impact industrial credit offtake, further strangle private investment and impact growth. “The recovery process will be affected... the impact will start with a weak currency, leading to RBI interventions, higher interest rates and slowed investment,” he observes.

However, options to mitigate the fallout are limited. “There is an important call the government will have to take: either subsidise the rise or reduce taxes,” observes Sabnavis. Both these options are fraught with peril. With post-GST tax revenue collections lower than expected, both options cut down room for expenditure while the former also goes against the ongoing mission to reduce the subsidy burden.

“Possibly, it will be a mix of duty cuts and subsidies,” Bhattacharya said. Which way the government decides to go will become clearer with the presentation of the Union Budget on February 1, when Finance Minister Arun Jaitley will walk a tightrope between economic and political necessities.

Stay up to date on all the latest Business news with The New Indian Express App. Download now

O
P
E
N

More from this section

SEBI decides against granting exemption to S H Kelkar and Co promoters

Reliance Jio to recruit 80,000 people this FY

Ford hybrid  Freestyle now in India 

Latest

Mike Pompeo approved as US secretary of state

Indu Malhotra to be sworn in as SC judge tomorrow

Nine youths die in Israel flash flooding

CSIR bags National Intellectual Property Award

Rs 600-cr loan fraud: CBI books IDBI top officials

ICC meet: Cricket might be part of Olympics by 2028

Bypoll for Kerala's Chengannur assembly seat on May 28

Bengal panchayat poll on May 14

IPL2018
Videos
'Veere Di Wedding'  (Image Courtesy Twitter @vdwthefilm)
Poster Of Veere Di Wedding Creates Chatter Social Media
People gather around the mangled school van after it collided with a moving train in Kushinagar Uttar Pradesh on Thursday morning. | PTI
Kushinagar accident: Prima facie shows driver was at fault, says Gorakhpur Commissioner
Gallery
Traditional pomp and glory and the whopping participation of festival buffs including foreigners marked the conclusion of yet another edition of Kerala's Thrissur Pooram, considered as the mother of all temple festivals, here today. (Express Photo | Albin
Kerala's biggest temple festival Thrissur Pooram in pictures
The trailer of 'Veere Di Wedding', featuring actresses Kareena Kapoor Khan, Swara Bhasker, Sonam Kapoor and Shikha Tilsania, which was released at a grand event today, sparkles with chic chick splendour. (PTI Photo)
IN PHOTOS | Kareena Kapoor Khan, Swara Bhasker, Sonam Kapoor, Shikha Tilsania launch 'Veere Di Wedding' trailer

Trending

FOLLOW US

Copyright - newindianexpress.com 2018

Dinamani | Kannada Prabha | Samakalika Malayalam | Malayalam Vaarika | Indulgexpress | Edex Live | Cinema Express | Event Xpress

Contact Us | About Us | Careers | Privacy Policy | Search | Terms of Use | Advertise With Us

Home | Nation | World | Cities | Business | Columns | Entertainment | Sport | Magazine | The Sunday Standard