– By Chinmay Joshi
The global is still not yet fully out of the woods from the aftershocks of Covid-19 pandemic and the ongoing war between Russia and Ukraine in Eastern Europe. The recently released World Economic Outlook (WEO), October 2023, by the International Monetary Fund (IMF) also predicted a bleak global economic recovery from 3.5% in 2022, 3.0% in 2023 and further deceleration to 2.9% in 2024Guoabong Stock. Amidst this environment of malaise, the Indian economy is expected to post a robust growth as a result of strengthening of domestic consumption and investment demand, revival of consumer and business confidence, improving industrial activity and thrust on capital expenditure among others. However, downside risks emerge from the persistence of heightened inflation, erratic climatic changes and rising geo-political tensions in some parts of the world. This has been evident in the latest MPC resolution released by the Monetary Policy Committee (MPC) of Reserve (RBI) on October 06, 2023 where economic growth is expected to exhibit a decreasing trend from 6.5% in Q2, 6.0% in Q3 and 5.7% in Q4 for the year 2023-24.
The beginning of a geo-political crisis in the Middle East Asia as a result of war between Israel and Palestine will aggravate the already weakened global growth prospects. The prolonging and widening of the conflict engulfing the neighbouring regional powers especially Saudi Arabia, Iraq and Iran has a potential to increase the inflationary pressures worldover through the rise in prices of and other energy products as these countries are major oil producing and exporting countries in the world. In the year 2022, the Persian Gulf countries produced around 32% of world’s total oil production. Besides, the share of Saudi Arabia, Iraq and Iran consisted of 13%, 5% and 4% respectively in total world oil production. This accentuates the significance of these countries in the international energy market as collective contribution from these countries was more than one-fifth of the total world oil production in the year 2022.
The adverse implications of rising international crude oil prices will be manifested in terms of imported inflation for as it is heavily dependent on the import of crude oil in order to meet its rising domestic energy demand arising out of retail, transportation, agriculture, industrial sectors among others. As per the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas, August 2023 report, India’s import dependency of crude oil increased to 87.8% in April-August 2023 as compared to 86.5% in the corresponding period a year ago. It is also important to note that India, which is the third largest crude oil importer in the world, imports a significant quantity of crude oil from Persian Gulf countries. As per the NITI Aayog, in the fiscal year 2022, Iraq was the largest crude oil supplier to India followed by Saudi Arabia, United Arab Emirates (UAE) and so on. As a result, India is highly vulnerable to any supply side shocks, arising particularly from this region.
The rising crude oil prices will be a boon for oil producing and exporting countries whereas it will be a bane for oil importing countries like India. Rising oil prices will inevitably impact the Indian economy in terms of increase in import bills. The sudden surge in the import bills will lead to increase in trade deficit for India especially when the global trade and exports outlook is subdued. The persistent rise in trade deficit may further lead to higher current account deficit (CAD). Higher CAD coupled with capital outflows will result in a deficit in India’s overall balance of payment account which will lead to decline in India’s foreign exchange reserves. In this context, it is important to note that India’s CAD widened to 9.2 US $ billion (Q-o-Q) during the Q1 of FY 2023-24 mainly due to the higher trade deficit caused by increase in global commodity prices especially rising crude oil prices as well as lower receipts from net services among others. Increase in international crude oil prices beyond 100 US$/barrel will certainly prove detrimental for India’s current account balance going aheadNagpur Investment. As per some estimates, every 10 US $ rise in the brent crude oil prices internationally, will lead to widening of India’s CAD by 0.5%. Apart from that, higher import bills will also have ramifications for the exchange rate of the Indian currency as rise in import bills will lead to increase in demand for the US Dollar leading to further depreciation of the vis-à-vis the US Dollar.
Furthermore, the increase in oil prices may require government of India to roll out fiscal subsidies in order to atone the rising losses of oil marketing companies (OMCs) which have resorted to keep the domestic petrol, and fuel prices steady for past couple of months keeping in mind the ensuing assembly and general elections in India. Similarly, the possibility of reduction in excise duty on petrol and diesel to curb the rising price level arising out of higher energy and fuel prices together will impact the government’s revenue generation capacity which will negatively affect the ability of attainment of revenue and fiscal deficit targets for India.
Factors such as tightened crude oil supply as a result of extended oil production cuts by the OPEC + members especially by Saudi Arabia and Russia, possibility of sustained growth uptick for the US economy, halt in the sharp increase in monetary policy tightening across major economies in the world coupled with spillover impact of the rising Middle East tensions have a potential to further increase the oil prices in the international market.
In order to mitigate the risk arising out of such a volatility in the international oil market, India should diversify its sources of oil and energy products from traditional partners in the Gulf region and explore the new opportunities of cheaper imports of such products elsewhere. Besides, inter alia, increasing adoption of renewable and alternate fuels, providing more autonomy to domestic oil companies as well as encouraging private sector participation in domestic production of oil and natural gas, promoting and enhancing long term investment in research and development in exploring more indigenous resources of oil, natural gas and other energy products are some of measures which will be helpful to reduce heavy import dependence for oil and other energy products for India. Amidst these continuously deteriorating geo-political conditions and challenging economic situations, the policymakers in India need to be extremely vigilant and nimble in adopting a well calibrated and ingenious mix of policy actions to navigate the Indian economy efficaciously without having any serious repercussions.Kolkata Stocks
(Chinmay Joshi is the Research Associate – Finance and Economics at Bhavan’s SPJIMR.)
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