Wednesday, Oct 05, 2022
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Crude Oil Hits $100 Amid Russia-Ukraine Crisis: Here's How It Will Impact India

Following Putin's announcement of military action in Ukraine, the Indian equity benchmarks nosedived on Thursday

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Crude oil

Brent crossed $100 per barrel on Thursday for the first time in 8 years, after Russian President Vladimir Putin's decision to launch a special military operation in Ukraine.

Following Putin's announcement of military action, the Indian equity benchmarks nosedived on Thursday.

Japan's Nikkei dropped 2.3 per cent, Hong Kong's Hang Seng tumbled 2.6 per cent and South Korea's KOSPI dropped 2.8 per cent.

The Nifty 50 index dropped as much as 516 points to hit an intraday low of 16,546 and Sensex plunged a whopping 1,857 points to hit an intraday low of 55,375.

The government and the financial sector regulators are keeping close tabs on the evolving Russia-Ukraine situation, high crude oil prices and the extreme volatility in financial markets, Finance Minister Nirmala Sitharaman said on Tuesday, ruling out any extraordinary or special measures to cope with the implications of these headwinds.

Given that India imports 85% of its requirements, this could be of some concern for the country.

The Economic Survey 2022 estimated India’s Gross Domestic Product (GDP) growth rate at 8.0-8.5 per cent in 2022-23, which hinges on crude oil prices being in the range of $70-$75 a barrel.

Crude oil prices have been rising from lows of $68 at the beginning of December amid strong demand.

However, this may not be good news for India as a high oil price means a higher import bill and inflation for India.

Chances are the crude import bill this fiscal is likely to substantially exceed last year’s level.

In April-December this fiscal, India imported 156.4 MMT of oil valued at $82.4 billion as against 143.4 MMT at $39.6 billion during April-December in FY21.

A rise in global oil prices by $10 a barrel raises the current account deficit—which is the broadest measure of India’s goods and services transactions—by $9-10 billion.

With much higher oil prices currently, the deficit may exceed forecasts of $40-45 billion, or 1.4% of GDP, for FY22.

High oil prices are certainly not good news for India. There may not be an immediate pass-through to higher domestic retail prices due to the ongoing state assembly elections but the central government may take some measures after that.

Moreover, domestic crude production has been steadily declining from 38.1 MMT in FY12 to 30.5 MMT in FY21. Till December this fiscal, production at 22.4 MMT is lower than output during FY21.

Petrol and diesel prices have not been revised since the Centre reduced excise duty on the two fuels on November 3, 2021, and state governments slashed the value-added tax (VAT) soon after.

High prices may result in a surge in inflation, increase the cost of inputs for various industries, make transportation expensive, raise the import bill and increase the current account.

Here are some of the major effects of rising oil prices on the Indian economy:


Inflation

Crude import accounts for nearly 20% of India’s import bill.

The fuel import bill jumped from $8.5 billion for the quarter ended June 2020 to $24.7 billion for the quarter ended June 2021.  

An increase in crude prices means an increase in the cost of producing and transporting goods.

India’s retail inflation rate accelerated to 6.01% in January, breaching RBI's upper tolerance limit. At 12.96% in January, India's wholesale inflation is in double digits for the 10th month in a row.

The RBI has projected average retail inflation of 4.5% in FY23.

Experts expect a sharp hike in petrol and diesel prices in March after state Assembly elections come to an end.

A rise in freight cost will increase the prices of everything from vegetables to manufactured goods.

A surge in crude prices tends to increase India’s expenditure and adversely affects the fiscal deficit.

On the other hand, a rise in oil prices impacts the current account deficit — a measure of the value of imported goods and services exceeding the value of those exported.


Impact on Rupee

The rupee has already started slipping and is moving towards the $ 75 per dollar mark.

Oil import accounted for nearly 27 per cent of India’s total imports in FY19 and fell to 21 per cent in FY21. However, with restrictions easing, the import is likely to get back to the pre-pandemic level as activity picks up and demand rises.

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