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India may get a USD 22 bn crude oil windfall

Russia's  decision to spurn its erstwhile OPEC allies in their renewed attempt to cut crude oil production may turn into a bonanza for India.

Published: 08th March 2020 08:11 AM  |   Last Updated: 08th March 2020 08:11 AM   |  A+A-

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For representational purposes

NEW DELHI: Russia's decision to spurn its erstwhile OPEC allies in their renewed attempt to cut crude oil production may turn into a bonanza for India. The failure to form a consensus on supply cuts has sent Brent prices diving over 9 per cent to its lowest since June 2017, closing at $45.27 per barrel on Friday, and if prices remain at the $50 per barrel range for the rest of the year, India may save a whopping $22 billion in its import bill in FY 21.

The subsequent decrease in retail fuel rates, provided the Centre and state government choose to pass on the benefit, will also significantly reduce inflationary pressure. Retail inflation had spiked to a high of 7.6 per cent in January, pushed by rising fuel and food prices. “In a situation where the economy is in a downturn, this is good news,” said Dharmakirti Joshi, chief economist, Crisil.

With Russian energy minister Alexander Novak telling reporters that all production cut commitments agreed to by oil suppliers will become ineffective from April 1 this year, market analysts expect prices may fall even further until the advent of summer and rising temperatures. “It is assumed that the coronavirus may not survive high temperatures. So until April or May, travel and business activity will continue to fall and so will demand and prices. I believe speculatory forces may even see brent crude fall to $38-40 per barrel before recovering,” pointed out Gaurav Moda, Energy Industry lead, Accenture. The demand destruction perpetrated by the outbreak is likely to persist for the next few quarters. 

Petrol, diesel prices may soften as crude rates drop

ECONOMISTS do not see crude oil rising above $60 a barrel over the course of 2020, including the US Ene r g y I n f o r m a t i o n Administration. With the price of the Indian crude oil averaging over $63 per barrel in 2019- 20, “any price below $60 a barrel is good for India,” said Madan Sabnavis, chief economist, CARE Ratings. In fact, assuming India’s total crude oil demand at the same level as in 2018-19 (226.5 MT), crude oil at $50 would result in a total crude import bill of just $83 billion.

At $45 per barrel, the import bill will stand at $74.71 billion, $66.41 billion at $40 per barrel and $63.09 at $38 per barrel. Compare that with FY19’s import bill of $112 billion and the estimated $105 billion for FY20. The resulting improvement in India’s trade deficit is likely to mitigate the impact from ongoing disruptions to its net inflows from sectors like software, tourism and transport, as well as sectors like automobiles, gems and jewellery and pharmaceuticals, which are likely to be significantly affected due to the coronavirus outbreak. 

This could provide a cushion to India’s current account deficit, or the gap between current foreign exchange expenditure and income. India’s CAD in 2018- 19 stood at $ 14.3 billion or 2 per cent of GDP. For the consumer, the most direct impact is likely to be in the expected decrease in petrol and diesel prices. Petrol has already fallen from Rs 76 per litre in New Delhi at the beginning of January to Rs 71.14 per litre and diesel from over Rs 69 per barrel to Rs 63.8 now. 

Lower prices of transportation- fuels theoretically should help draw down prices of all goods, though in practise it may not happen as prices tend to be sticky and often refuses to come down after rising. Besides, Sabnavis warns that not all of this benefit from lower crude prices is likely to be passed on to the consumer. “The Centre and state governments earn over Rs 4 lakh crore from taxes on oil and since an oil price cut will hit this revenue, they may choose to raise tax.”

GOOD NEWS FOR CONSUMERS
For the consumer, the most direct impact is likely to be in the expected decrease in petrol and diesel prices. Petrol has already fallen from Rs 76 a litre in New Delhi at the beginning of January to Rs 71.14 per litre and diesel from Rs 69 per barrel to Rs 63.8 now

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