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[op-ed snap] The risk of rising crude oil prices

Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Effects of rising crude oil prices on Indian Economy.


News

Context

  1. The article talks about the possible effects of rising crude oil prices on India.

India had Benefited from lower crude prices

  1. As a large importer of crude oil, India benefited significantly from lower prices
  2. It helped contain inflation and had a favourable impact on both the fiscal and current account deficits

Rising prices of crude oil

  1. Oil prices touched a two-year high earlier this week and have gone up by about 14% over the last one month
  2. Reason behind this increase: prices could remain elevated owing to several reasons, such as
    (1) drawdown in inventories, especially in the US,
    (2) better compliance with the voluntary production cut by the Organization of the Petroleum Exporting Countries (Opec),
    (3) slower pickup in US shale oil and continued geopolitical risk in West Asia

Other reasons behind this increase in prices

  1. Opec members reduced production more than they had initially agreed to
  2. Further, the internal power struggle in Saudi Arabia has added to the uncertainty
  3. According to the International Monetary Fund, Saudi Arabia will need oil prices to be at $70 per barrel for fiscal break-even in 2018
  4. Members of Opec will meet later this month and it is likely that they will work to push oil prices to around the $70 per barrel mark in the coming year

Is there any challenge infront of India due to this increase?

  1. Even though India is in a relatively strong macroeconomic position, a higher level of oil prices could still pose challenges for policymakers
  2. However, higher oil prices could have the opposite effect and impede economic recovery in the coming quarters
  3. They could have implications for growth, inflation, currency, current account deficit and fiscal deficit
  4. But given India’s macroeconomic position, the impact of higher oil prices on individual indicators may not look worrying as of now
  5. But put together with added uncertainty related to revenue and economic activity due to teething problems with the goods and services tax, could worsen the outlook for India

Other effects on Indian Economy

  1. Expectation of higher inflation will reduce the chance of a potential rate cut and could affect market sentiment
  2. Higher oil prices will also affect corporate India’s profit margins and could delay the much awaited earnings revival
  3. A relatively less favourable macro outlook and a decline in profit margins would affect the equity market where stocks are richly valued

The way forward

  1. The situation is not alarming for India at the moment, but policymakers would do well to remain watchful
  2. It is likely that the RBI’s monetary policy committee will mull over the possible fallout
  3. Meanwhile, the government would be well advised to avoid reducing duty if prices remain at higher levels
  4. It would need higher revenue to push capital expenditure and move forward with fiscal consolidation
  5. It will be extremely important to keep fiscal deficit in control in order to protect hard-won macroeconomic stability
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