Crude price is trading below the $100 psychological level. As everyone knows Crude oil prices play a very significant role on the economy of any country. India’s growth story hovers around the import of oil as India imports 70% of its crude requirements. Any negative change in the crude oil price has an immediate positive impact on the increment in the GDP and IIP. A one-dollar fall in the price of oil saves the country about 40 billion rupees. That has a three-fold effect spread across the economy.
- If the average fall in oil prices is about $4 per barrel in 2014-15, the trade deficit will shrink by about $3 billion. In the April-June quarter, the current account deficit had dropped to $7.5 billion, mainly due to customs duty on gold imports. Add to that the fall in oil prices and the current account deficit should come down further and harden the rupee against the dollar.
- The fall in international oil prices will reduce subsidies that help sustain the domestic prices of oil products. Petrol prices are already decontrolled. The more commonly used diesel has been subject to staggered deregulation since September 2012.
- In September this year, the difference between domestic and international prices of diesel will be only 8 paise per litre, which can make diesel eligible for deregulation in about a month.
- It is kerosene and liquefied petroleum gas (LPG) that are still heavily subsidized. And looking at the mood of the government, they are unlikely to be market-priced in the near future. The total subsidy on petroleum products in 2013-14 was 854 billion rupees and it will be reduced to the extent the international price of crude declines. The advantage will accrue mainly to the government and oil-producing companies such as ONGC and OIL. Consequently, the fiscal deficit that in 2014-15 is projected at 4.1 percent of GDP may be somewhat reduced.
- The fall in international prices of oil will have a soothing effect on inflation. But it won’t be strong enough because the consumption of oil in industry is not that high except in the manufacture of certain products like carbon black.