Rising Oil Prices Could Derail India's Economic Comeback
India’s struggle of economic comeback seems to be hit hard through the ongoing Iraq crisis that has led to the consistent rise in the prices of crude oil at the international level. Important to note that the prices of crude oil, which were in the healthy range of $104-$105/barrel has surged to $115/barrel amid Iraq crisis that has hit the global oil supply in the world. However, India, which is the major importer of oil from Iraq seems to be hit hard with multiple effects on its economy and economist are even questioning if the new prime minister will be able to live up to his plans to resuscitate the economy. The immediate effect on the third largest Asian economy of the increased oil prices is the exacerbated fiscal and current account deficits along with already existing high inflation rates.
Indian economy, which was heading high with premium stock market performance and Indian rupee strengthening against the Dollar, saw a significant decline once the oil prices surged. India is most likely to be impacted more than other countries as 13% of its total oil imports worth 190 million tons are from Iraq and a disrupted supply has largely affected the oil companies and the inflation index in the country. The first companies to feel the oil effect were the multi billionaire corporations, Indian Oil and Reliance Industries Ltd who largely depend on Iraqi Oil. Courtesy disrupted supplies from Iran, these companies are now looking for new suppliers to run their plants to full capacity and thus, a cascading impact is being faced by petrochemical companies, power plants and other major users of petroleum products. As a result, the stocks of oil companies have again plunged with Indian Oil shares have fallen as much as 8%, while Reliance shares fell about 5%.
However, the major concern for the Indian economy is not the falling prices of oil companies rather the country’s economic performance is highly dependent on oil prices that largely affects the CPI index in the country. For Instance, a $10 per barrel rise in price of crude oil increases the inflation rate by whole one percentage over a 12 month period. Furthermore, increased price of crude oil pushes up the gasoline prices which further increase the prices of food and other commodities because of the increased transportation costs. Hence, if the rise in price of crude oil continues to sustain then it will surely slow down the economic growth in the country and this will be a great setback for the new government to improve the fiscal position of the country.
In a broader economic analysis, one dollar increase in the price of crude oil increases the government’s subsidy burden by about 60 billion rupees. Thus, if the oil crisis remains, this will not only inflate the India’s massive subsidy bills but then the country will have little hope of reaching its budget-deficit target of 4.1% of GDP this year. In such case, India might also face the risk of sovereign downgrade by rating firms who have flagged the country's weak fiscal health as one of the key issues hurting the economy.
However, at present, Indian economy can withstand this kind of price levels but it will indeed be a problematic situation if the Iraq problem continues to exist and oil prices keep on increasing.
CHATURVEDI, ANANT VIJAY KALA And SAURABH. Rising Oil Prices Could Derail India's Economic Comeback. 20 June 2014. 22 June 2014 <http://online.wsj.com/articles/rising-oil-prices-could-derail-indias-economic-comeback-1403268133>.
Shah, Ami. Sensex, Nifty record new closing highs. 9 June 2014. 22 June 2014 <http://www.livemint.com/Money/vI5k3aqRFFlijdEA9R8caM/Sensex-hits-fresh-record-high-after-rising-for-a-third-day.html>.