While oil exporting nations are benefiting from higher oil prices, oil importers face growing crude import bills that affect government finances.
India—the world’s third-largest oil importer—is one of the biggest losers of the higher oil prices in recent months, as the increased price of oil widens its trade deficit, puts more upside pressure on inflation that threatens to exceed government targets, and risks reducing current projections for robust economic growth. All this is happening while Indian politicians and consumers (voters) face a series of elections this year and next, with a general election expected to be held in the spring of 2019.
In March 2018, India paid a nearly 14-percent higher crude oil import bill than in March 2017. The value in U.S. dollars of India’s oil imports—accounting for more than 80 percent of its oil consumption—in the fiscal year April 2017-March 2018 rose by 25.47 percent compared to the previous fiscal year, government trade data shows.
In early April, India’s Oil Minister Dharmendra Pradhan told Bloomberg that oil prices at $70 a barrel are ‘too high’ for India’s economy, which is a very price-sensitive market.
“I’d be more than happy if the prices are around $50 plus,” the minister said, adding that if the Saudis were targeting $80 a barrel oil price, it would “pinch India in a big way.”
While international crude oil prices hit three-and-a-half year highs in April, gasoline prices in Delhi surged to their highest in four years, and diesel prices hit an all-time high.
Last week, Minister Pradhan expressed concern about the high fuel prices, adding that the government needs to keep a balance between the interest of consumers and of India’s fiscal situation amid the higher price of oil.
Although the minister did not specify what—if any—measures could be taken, analysts suggested earlier this year that the government may face a dilemma ahead of the elections: reduce excise duty and impact state finances, or re-introduce fuel price caps to control inflation and thus dent state oil refiners’ revenues.
The Reserve Bank of India is citing higher oil prices as one of the main risks to rising inflation that could exceed its 4-percent medium-term inflation target. Economic growth is currently expected at 7.4 percent in the 2018-2019 fiscal year that began in April, up from 6.6-percent growth in the previous fiscal year on the back of increased investment activity and stronger manufacturing sector, the central bank says.
If oil prices continue to increase, however, they will negatively impact the current economic policies in India, analysts reckon. Related: The Next Big Threat For Chinese Oil Demand
“Higher global crude oil prices are net negative for the Indian economy in almost all aspects,” Kaushik Das, chief economist at Deutsche Bank AG in Mumbai, told Bloomberg.
According to the economist, Brent at $75 a barrel could lead to Deutsche Bank reducing its expectations for India’s growth to 7.3 percent from 7.5 percent.
According to analysts at Nomura, every $10 increase in oil prices would lead to deterioration of 0.4 percent in India’s current account deficit. While Nomura expects growth in H1 2018 to be strong at 7.8 percent, rising oil prices and a likely slowdown in investment activity ahead of the elections could lead to GDP growth moderating toward 6.9 percent in Q4 2018.
“Rising oil prices risk reversing the improving economic fundamental ‘sweet spot’ experienced during 2014-16,” Nomura’s analysts say.
Higher oil prices affect India’s economy and inflation targets, and are now posing one of the toughest tests yet for the government that is gearing up for elections amid the highest fuel prices in the country in years.
By Tsvetana Paraskova for Oilprice.com
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