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Global crude oil prices are hovering near their 2008 record as the Ukraine-Russia conflict puts pressure on the energy supply chain, raising concerns of a wider impact on Asian economies, especially the net oil importers.
India is a net oil importer, and the rising oil prices could significantly impact the country’s current account deficit and inflation, while also weighing on corporate profitability. China is the world’s biggest crude importer in Asia, followed by India, South Korea, and Japan, as per S&P Global.
Russia is the world’s second-largest producer of oil, and any sanctions in this aspect will impact global oil prices. A majority of Europe depends on Russia for its energy needs. The benchmark Brent crude index was above $130 a barrel yesterday, and a ban on Russian oil will only push this price higher. Russia’s Deputy Prime Minister Alexander Novak in a statement said crude will cost $300 a barrel if the world rejects Russian oil.
Incidentally, demand for oil has surpassed pre-Covid levels on the back of a recovery play, further adding to the problem.
Impact of crude oil price on India
The Reserve Bank of India (RBI) has been mulling a policy change considering the rising inflation, and higher oil costs are only going to put further pressure on the central bank. India’s inflation has already surpassed the RBI target of 4-6%, and a further increase in fuel prices will take spending power away from the consumers, hurting the overall economy which is still recovering from the pandemic.
However, Morgan Stanley sees a limited impact of oil prices on the Indian economy compared to previous such instances. “The rise in oil price is a threat but not strong enough in the context of the policy environment,” the market research firm said in a report. It said India’s oil consumption as a share of GDP has been below the 10-year average for the past few years.
Meanwhile, Nomura estimates that each 10% increase in oil prices will shave off 0.2% of India’s GDP and widen the current account deficit by 0.3%. The research firm in a note said that India imports 85% of the oil it requires and will likely be among the worst affected country in Asia, along with Thailand and the Philippines.
Morgan Stanley reiterated the sentiment and said India is exposed to both inflation and current account rise. “India, where inflation is already tracking above RBI’s comfort zone and the resultant currency volatility could bring forward our expectations of a June rate hike to April instead,” it added.
Natixis emerging Asia economist Trinh Nguyen during an online panel discussion added that Indian consumers had a reason to worry as the government had little in-store in the budget for fuel subsidies.
Higher inflation will directly hit consumption in India, and industries that rely on oil and petrochemicals as raw materials – such as plastics, resins, FMCG, personal care, etc – will face issues.
India’s response to contain oil price spillover
The incumbent government in India is likely to take a call on passing on the price pressure to the consumers only after local elections are completed. Petrol and diesel prices in the country are already at an all-time high and Nomura sees a further 10% hike in petrol and diesel prices post the State Assembly elections which ended on March 7.
On the other hand, Saugata Bhattacharya, chief economist at Axis Bank Ltd, tells Bloomberg that a 10% increase in retail prices of fuel and liquefied petroleum gas could result in a 50 to 55 basis point rise in headline consumer prices over the next year.
Apart from putting pressure on the budget, the high oil prices may also impact the government’s planned asset sales. State-insurer LIC’s IPO, which would be the country’s largest-ever public issue, is likely to be postponed due to a weak market.
Oxford Economics in a report said that with global oil prices rising, and other commodity prices too gaining, India is likely to see subdued growth throughout most of 2022. Cooking oil prices too will rise as commodity prices soar.
India could also consider cutting additional taxes on fuel, such as the excise levy, which in turn would impact the government’s fiscal deficit goal.
