Low oil prices could fuel the next phase of India’s growth

Oil prices are falling on signs of weakening demand in advanced economies and China, and continuing uncertainty about whether the Organization of Petroleum Exporting Countries and its allies including Russia (OPEC+) will implement the voluntary supply cuts it announced last week.

Brent crude futures settled at $78.03 a barrel on Monday after falling 2% last week. The markets are not convinced that the voluntary cuts OPEC+ announced on Thursday would affect prices in the coming months, given that global demand has cooled. There are doubts whether the voluntary cuts will be implemented at all, as Reuters reported.

Another development favouring soft oil prices is the record production of US crude oil, which set a record for the second month running in September.

India also resumed imports of crude from Venezuela in October, ending a three-year hiatus forced by US sanctions that have since eased. Reuters reported that select Indian refiners may have bought some four million barrels of Venezuelan crude for February delivery at $7.50 to $8 a barrel below dated Brent on a delivered ex-ship basis.

India’s economy is energy-intensive and highly sensitive to crude oil prices, as demand for petroleum products isn’t price elastic. Higher oil costs erode profits as households and businesses aren’t able to adjust demand by much.

Whenever oil prices rise, GDP growth is affected, and when they ease up, the economy recovers smartly. This oil bonanza accrued to the economy in 2014-15, for instance, when global crude oil prices slumped suddenly. After remaining high for months and testing $120 a barrel in June 2014, crude prices fell to $50 a barrel in January 2015. By January 2016, they were close to $20 a barrel. The impact was discernible in India’s GDP growth, which shot up from 6.4% in 2013-14 to 8% in 2015-16.

Quarterly GDP data released by the National Statistics Office on November 30 already shows that falling oil prices boosted corporate profits and thus GDP growth in July-September. Brent prices, which were around $128 a barrel in March, have dropped to around $80.

Manufacturing was the best performing sector in July-September, clocking growth of 13.9%, a nine-quarter high. The 7.6% year-on-year GDP growth reading during the quarter got a boost of 50 basis points from lower oil prices, according to an estimate by economists at HSBC.

The increased likelihood of softer global crude prices is therefore good news for India and boosts optimism as the economy continues to defy weak global growth.