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India’s FY19 current account deficit expressed as a percentage of GDP will cross 3%, with crude oil prices at $80 a barrel average. Graphic: Mint
India’s FY19 current account deficit expressed as a percentage of GDP will cross 3%, with crude oil prices at $80 a barrel average. Graphic: Mint

The double whammy from rising crude oil prices

The surge in crude oil prices past $80 a barrel has increased India's dependency on oil imports and shot up the bill for it

The blow from rising crude oil prices is twofold. One, India’s crude oil import dependency is increasing. The chart above shows the country’s import dependency of crude oil has increased to 83.7% for April 2018. The measure stood at 77.3% in fiscal year 2014 (FY14).

Simply put, we are consuming more petroleum products and to compensate for our lacklustre local crude oil production growth, we will have to resort to imports. Unfortunately for us, this trend is not expected to change soon.

The second part of the problem is that Brent crude prices are hovering around $80 a barrel. This means incremental pressure in value terms. India’s crude oil import bill has increased consistently in the last three fiscal years and were oil prices to sustain higher, the trend shall continue.

There are larger implications. India’s FY19 current account deficit (CAD) expressed as a percentage of gross domestic product (GDP) will cross 3% with oil at $80 a barrel average, according to Kotak Institutional Equities.

PhillipCapital (India) Pvt. Ltd is more optimistic. CAD can widen to 2.4% of GDP ($69 billion), primarily led by higher oil imports, point out economists from the brokerage firm. This is assuming Brent crude sustains at $80 a barrel for the entire FY19 and the rupee is in the range of 66-70 to the US dollar.

Higher oil prices will also mean higher inflation, as retail prices of petrol and diesel should follow suit. Also, companies facing higher input costs owing to higher prices of crude oil or derivatives of crude oil may take price hikes to pass on the impact of higher costs to consumers.

All is not lost though. India’s low external debt/GDP and reasonable foreign currency reserves will enable it to withstand the negative sentiment against emerging markets better, highlights Kotak in a report on 22 May. Nonetheless, the country will face “internal" issues in the form of higher inflation and possibly weaker growth from high oil prices (if oil prices were to stay at current levels), added the Kotak report.

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