NEW DELHI: Sustained rise in crude oil prices will have an adverse impact on the overall growth of the economy, a top government official said Wednesday amid continuing higher oil prices and inflation. He further said that the prolonged elevated prices above $110 per barrel will trigger further inflation forcing the Central Bank to increase interest rates.
“If crude oil prices remain between $110-120 per barrel for at least a month then it will lead to higher inflation which in turn would hamper the overall growth of the economy,” the official told The New Indian Express. As India is highly dependent on coal imports for its energy needs, the soaring crude oil prices will cause power companies to increase the tariffs, he added.
The price of coal has increased 196% year-on-year globally. “Energy cost will increase the prices of most of the items. In case of fixed tariffs, power generation companies won’t be able to recover their costs and may incur huge losses, which in turn would lead to a bad loan scenario for Public Sector Banks. Besides this, cement, steel and paper industries may also run into deep losses as they have dedicated plants which run on coal,” the official said.
It is also to be noted that the Reserve Bank of India (RBI) is already under immense pressure to increase the interest rates to contain inflation. According to the official, an increase in interest will negatively affect the growth rate of the country thereby causing job losses. Also inflation will discourage foreign investors to invest in India and will depreciate the rupee.
“Current account deficit and fiscal deficit would also widen due to higher inflation. Government’s cost of borrowing will also rise which will have a cascading effect on the interest rates,” he further added.
On Wednesday, Brent crude closed at $104.60 per barrel, 1.91% lower than the previous close.