Indian government’s elbow room may get reduced dramatically if prices keep inching up

Global crude oil prices have already breeched the $45 per barrel figure in September 2016. Not a healthy sign considering that in January, it had hit the rock bottom of $28 a barrel and the highest of $50 in June. As winters approach demand for crude oil increases, adding to a global upswing in prices.

Crude oil prices have the potential to make or break the global economy. In July 2008, crude oil touched its lifetime high of $147.27 sending the global economy, already in a downward spiral, into a tailspin. It fell to under $50 per barrel in January 2015 for the first time since May 2009, providing relief to many oil consuming nations.

OPEC and Russia, the largest oil producers(28% of 88 Mn barrels of crude) are holding talks to ensure that it is a win-win situation for the oil producing nations. This includes trying to reach a bilateral oil and gas cooperation formula. Some OPEC countries have supported the cooperation pledge by the two countries, suggesting the crude oil under $50 per barrel was “unacceptable”.

Countries like Russia, Saudi Arabia and Venezuela are heavily dependent on earnings from crude oil to sustain their economies. Russia is estimated to lose $2 billion with every dollar fall in crude oil prices while.

Unfortunately, that spells as very bad news for the rest of the world, including India, where 80% of our domestic requirements are met by imports!

Crude oil inching towards the $50 per barrel mark could be a worrying sign for India.

During the last 10 years, India has imported inflation because of high global crude oil prices. Over the years, this has been one of the weakest links for India’s fiscal management.

Over the last 12-18 months, the government has raised customs and excise duties which showed up in its tax collections. During 2014-15, the government earned Rs. 75,441 crore compared to Rs. 46,926 crore a year ago. In addition to this, state governments earn revenue by levying sales tax. The ability of governments will be severely curtailed if crude oil prices were to continue the upward spiral. But, during this time when the prices were sliding, it did not mean that consumers in India paid less.

During 2015-16, as a result of low crude oil prices India’s oil import bill has nearly halved to around $70 billion, giving the government elbow room for spending on growth on schemes like ‘Housing for All’, which could be a game changer for India’s urbanisation plan. Prices of inputs like steel, cement, machinery and other could see an increase with higher oil prices.

I hope that the Government has factored in the price rise of crude imports in the budget, otherwise, with rising inflation, the spectre of a huge fiscal deficit also looms large, spelling trouble for Indian economy!