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The continued rise in crude oil price and forecasts that it would touch $110 a barrel in 2022, up from around $84 this week are raising concerns for experts and policymakers, as India emerges from the pandemic’s grip. Mint takes a look at what is at stake.

Where is oil price headed?

Crude oil price has recovered from the  lows  seen  last  April  and  has  been climbing steadily in recent months. Since the beginning of this fiscal year, the monthly average of the Indian basket of crude—the average of Oman, Dubai, and Brent crude—has appreciated by $19 a barrel till October, and analysts have predicted it to touch $110 in 2022, that is, a further 30% appreciation. This could have an impact on cost of living, consumption, and economic growth. But the silver lining is that unlike a decade ago, consumers are more used to daily revision of retail auto fuel price and the Centre has a strategic reserve of crude oil.

How could it affect the economic growth?

Oil price remaining in the $80-90 range or surging further can prove to be a dampener on economic growth, unless central and state governments bite the bullet and cut taxes in a coordinated way, according to HDFC Bank chief economist Abheek Barua. Experts believe oil price staying above $100 a barrel on a sustained basis could shave off around 30-60 basis points from gross domestic product (GDP) growth rate, depending on the price level and how long it sustains. A potential surge in the consumer price index (CPI)-based inflation could have implications for the accommodative monetary policy stance.

What is the impact on exchequer?

Petrol and diesel, which are outside GST, attract central excise and state-level value-added tax (VAT). The Centre’s tax receipts, which are in absolute terms (taxes levied as per litre), go up only when consumption goes up, while VAT receipts of states levied on ad valorem basis (% of price) go up with price increase. Upcoming state polls could put pressure on governments to cut taxes.

What is the impact on consumers?

Fuel prices feed into the price of other goods and services and impact retail inflation. High commodity price in general has been often cited as a factor that has contributed to improvement in GST collections in recent months. A $10 a barrel increase in the price of crude oil could impact CPI-based inflation by 20-40 basis points, said Sachchidanand Shukla, chief economist at Mahindra & Mahindra. On the other hand, market-linked pricing of auto fuel has removed the sub-sidy burden on the government.

What’s the impact on markets and industry?

Experts see a link between capital flows into oil and into emerging market equities, which share similar risk profile, suggesting that bullish oil markets coexist with appreciating equities. However, manufacturers are complaining about rising input costs, making manufacturing competitiveness all the more important. For policymakers, a surge in oil price coinciding with a coal supply shortage could pose a headache. According to HDFC Bank’s Barua, the economy could grow around 8.9-9.2% in FY22.

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