How falling crude prices are helping India manage inflationary, fiscal pressure3 min read . Updated: 28 Feb 2020, 02:24 PM IST
- The cost of the Indian basket of crude averaged $65.52 in December 2019
- Lower crude prices bring good tidings to the government’s exchequer amid a revenue shortfall
NEW DELHI : With the global crude oil prices on a downward spiral in the backdrop of coronavirus outbreak, analysts are expecting a perfect storm in the energy markets that will help major consumers such as India manage inflationary and fiscal pressures.
International benchmark Brent crude oil prices dropped with it trading at $52.18 per barrel. Crude prices hit a record $147 per barrel in July 2008.
The cost of the Indian basket of crude, which averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively, averaged $65.52 in December 2019, according to data from the Petroleum Planning and Analysis Cell. The price was $51.16 a barrel on 27 February. The Indian basket represents the average of Oman, Dubai and Brent crude.
India is the world’s third-largest oil importer and the fourth-largest buyer of liquefied natural gas (LNG). Every dollar drop in the price of oil decreases the import bill by Rs10,700 crore on an annualized basis. India spent $111.9 billion on oil imports in 2018-19 and is a key Asian refining hub, with an installed capacity of more than 249.4 million tonnes per annum (mtpa) through 23 refineries.
Lower crude prices bring good tidings to the government’s exchequer amid a revenue shortfall and a burgeoning fiscal deficit. A fall in global prices will positively impact India’s oil import bill and its trade deficit. A lower import bill could further help bridge the current account deficit.
It would also have a positive impact on inflation. Weighed down by a decline in the manufacturing sector, India’s factory output contracted in December, while retail inflation accelerated for the sixth consecutive month in January, raising doubts about the recovery process of the fledgling economy. India’s economic growth is estimated by the National Statistical Office to hit an 11-year low of 5% in 2019-20 on the back of sluggish consumption and investment demand.
Mint reported on 16 February about the sluggish Indian economy and industries that are heavily dependent on crude oil such as aviation, shipping, road and rail transportation likely to gain from a sudden drop in crude oil prices due to the coronavirus epidemic in China, the world’s biggest oil importer.
However, there are growth concerns triggering worries about another recession of the likes of 2008.
“COVID-19 is arguably the biggest risk to global growth since the Great Recession. The rolling geographic nature of the virus’s spread means its duration could be extended into the second quarter," S&P Global Platts said in a statement.
The outbreak of coronavirus in China has forced energy firms there to suspend delivery contracts and reduce output. This has impacted both global oil prices and shipping rates, with the Paris-based International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (Opec) cutting global oil demand growth outlook. Trade tensions and a slowing global economy also have an overhang on energy markets.
“For now, what we know for sure is that the month of February will record the worst oil demand contraction since the Great Recession. We also know that global aviation will be hit very hard across Asia and take months to get back in shape," Claudio Galimberti, head of demand, refining and agriculture analytics, S&P Global Platts said in the statement.
Mint reported on 26 February about the coronavirus outbreak has thrown a lifeline to India’s stranded gas-fuelled power plants with global liquefied natural gas (LNG) prices plunging to less than $3 per million British thermal units (mmBtu) from a peak of $11.3/mmBtu in September 2018. Plant operators are looking to revive their gas-fired capacity, which accounts for 7%, or 24,937.22 megawatts (MW), of India’s total capacity.
“In addition, we are aware that our best-case scenario — a V-shape recovery we last saw during the SARS-2003 outbreak — is already unachievable due to China’s inability to go back to “business as usual" at the beginning of February, and we project it will take another month for full normalization," Galimberti added.