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Source: media reports

The next oil shock for India

The next oil shock for India
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First Published: Tue, May 26 2009. 09 01 PM IST
Updated: Tue, May 26 2009. 09 01 PM IST
The spectre of rising oil prices is once again haunting Indian finances. And unless the new United Progressive Alliance (UPA) government reverses course from last term, oil may damage the positive economic outlook the market believes this election has ushered in.
From its high of $147 per barrel a year ago, oil fell to $30 in December. Since then, crude oil prices have recovered, crossing $60 last week.
Market optimists see this as a sign of recovery, but there may be bigger factors at play. Oil’s peak last year was part of a commodity bubble that the US Federal Reserve helped inflate with its easy-money policy. The same Fed has in recent months increased the size of its balance sheet and pumped in more money. Who’s to say this isn’t the harbinger of another bubble?
The last time around, this easy money not only made its way into India’s real estate and financial markets, but also took its toll on government finances. With oil making up one third of the import bill, the trade deficit in April-September 2008 ballooned to $60 billion. If global prices skyrocket again, this bill will be hard to avoid. But what can be avoided is the fiscal bill.
The government insisted last term on keeping domestic oil prices lower, leaving oil companies bleeding cash. The petroleum subsidy for 2008-09 already ran at Rs2,800 crore. The government even resorted to some clever accounting: Instead of increasing the cash subsidy to companies, it began issuing off balance sheet bonds. It issued at least Rs61,800 crore worth of such bonds in April-December, no small part of the consolidated fiscal deficit that threatens India’s credit rating.
The UPA, which touted its populism throughout the election campaign, may again decide against letting markets determine local prices. But, as the International Monetary Fund’s (IMF) John Lipsky warned this week, “While perhaps attractive in theory, limiting (oil) price fluctuations through direct intervention is unlikely to be either effective or feasible in practice”. Instead, demand has to be “more responsive to price signals”, while “stable and predictable investment” should be encouraged on the supply side. For that, the UPA must free prices from the clutches of controls and subsidies.
How will high global oil prices affect India’s economy? Tell us at views@livemint.com
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First Published: Tue, May 26 2009. 09 01 PM IST