Rising oil prices can impact India’s economic growth: Economic Survey 2017

New Delhi: Rising oil prices present a challenge to India’s growth, the Economic Survey presented in Parliament on Tuesday said.

“Price of crude oil (Indian basket) has increased from $39.9 in April 2016 to $52.7 in December 2016,” the Survey said.

The Indian energy basket represents the average of Oman, Dubai and Brent crude. The price was $54.63 per barrel on Friday.

The Economic Survey projected the economy to grow in the range of 6.75% to 7.50% in the next fiscal year 2017-18. However, the International Monetary Fund has pared down its growth projection for India to 6.6% in 2016-17 and 7.2% in 2017-18.

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The concern over crude oil prices stems from India’s energy import bill of around $150 billion, expected to reach $300 billion by 2030. India imports around 80% of its crude oil and 18% of its natural gas requirements. India imported 202 million tonnes of oil in 2015-16.

“Some possible challenges to growth exist. For example, the prices of crude oil have started rising and are projected to increase further in the next year. Estimates suggest that oil prices could rise by as much as one-sixth over the 2016-17 level, which could have some dampening impact on the growth,” the Survey said.

“For the next financial year, the recent uptick in global commodity prices, in particular crude oil prices, pose an upside risk,” the Survey added.

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This also comes at a time of faltering domestic crude oil and gas production and output cuts announced by the Organization of the Petroleum Exporting Countries (Opec).

India is one of the major consumers of Opec’s production, with the grouping accounting for 85% and 94% of India’s crude oil and gas imports.

“The downward spiral in international crude oil prices resulted in a decline in oil import bill by around 18 per cent which together with a sharp decline in gold imports led to a reduction in India’s overall imports,” the Survey said.

Extreme volatility has marked crude oil prices, which reached a record $147 per barrel in July 2009. Countries such as India that are dependent on imports to meet their oil needs are particularly vulnerable to price volatility.

“After remaining fairly stable for much of the last two years, international prices of crude oil have started to trend up. This along with rise in the prices of other commodities like coal, etc. could exert inflationary pressure and have the potential to adversely impact the trade and fiscal balances,” the survey added.

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Experts concur with the government’s concern.

“Rising oil prices are very much a possibility. For an economy which is vulnerable to any fluctuation in oil prices, it is better to err on the side of caution,” said Deepak Mahurkar, leader (oil and gas) at PwC India, a consultancy.

India’s energy demand growth is expected to outpace the other so-called BRIC (Brazil, Russia, China, India) countries, according to the latest BP Energy Outlook released last week.

India’s energy consumption is expected to grow by 4.2% annually, faster than all major economies in the world. As a result, India’s share of global energy demand will increase to 9% by 2035.

“Currently, India’s renewable energy sector is undergoing transformation with a target of 175 GW of renewable energy capacity to be reached by 2022,” the survey added.