Graphic: Vipul Sharma/Mint
Graphic: Vipul Sharma/Mint

High oil prices threat to macro stability, says UNESCAP

An increase in the oil price by $10 per barrel would bring down GDP growth by 0.2-0.3 percentage points, says UNESCAP

New Delhi: India’s inflation and current account deficit could widen significantly if high crude oil prices persist, the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) said in a report released on Tuesday.

An increase in the oil price by $10 per barrel would bring down GDP growth by 0.2-0.3 percentage point, quicken inflation by about 1.7 percentage points and worsen the current account balance by about $9-10 billion, UNESCAP said in the report titled The Economic and Social Survey of Asia and The Pacific 2018.

“Higher oil prices pose downside risks for large oil importers such as India, who benefited greatly from low oil prices for the last three years but now are experiencing higher inflation and a wider current account deficit," the report said.

Crude oil prices softened on Tuesday after touching a three- and-half-year high at $75 per barrel on 7 May. The rupee strengthened against the dollar on Tuesday closing at 67.07 after hitting a 15-month low on Monday on the back of a higher demand for the dollar from oil importers, as well as continuous outflow of foreign funds.

An UBS survey of 50 investors released on Tuesday raised similar concerns, holding that though India’s economic growth will gather momentum in FY19, macro stability risks on inflation, current account and fiscal deficit may widen. “In the near term, they seem to be concerned about a sharp global crude oil price rise, INR depreciation and the government’s fiscal health ahead of the 2019 general elections," he said.

UBS said the threshold for higher global oil prices for India is $70-75 per barrel, wherein macro stability risks widen but remain manageable. “However, oil strengthening and sustaining around $75-85 per barrel could undermine macro fundamentals. In such a scenario, we see a risk of INR 3-6% depreciation against the USD from the current level and at least 50bp policy rate tightening in FY19 depending on where global crude oil prices settle," it added.

The UNESCAP report said the recently introduced goods and services tax (GST), as well as weak corporate and bank balance sheets, resulted in modest economic growth, but signs of recovery emerged in the second half of the fiscal year.

“In India, a gradual recovery is expected. Private investment is expected to revive as the corporate sector adjusts to GST, infrastructure spending increases and corporate and bank balance sheets improve with government support," it said.

UNESCAP projected the Indian economy to grow at 7.2% in 2018-19 from 6.6% a year ago. However, it said India’s potential growth has declined over the past decade because of a sharp slowdown in capital accumulation. “Recent estimates of the country’s potential growth range from 6 to 8%," it said.