Crude shock good for India

Amid panic and rising economic uncertainty, the drastic drop in global oil prices will bring cheer to Finance Minister Nirmala Sitharaman. Since the beginning of 2020, global crude prices have been falling continuously, currently hovering below $35 a barrel.

With global demand for oil coming down as China—the largest importer of oil—was under a lockdown for months with the spread of the deadly coronavirus, the US has banned all inbound travel from Europe. As uncertainties grip most oil companies the world over with the steep fall in crude prices, India must aggressively focus on energy security and expand its stakes in oil fields outside the country. While the prices are low at present, these investments will provide financial stability when prices rise in the future besides increasing overall production.

Global prices will continue to remain subdued for the next few months with the rapid spread of the deadly disease, declared a global pandemic now by the World Health Organization (WHO).

This huge windfall couldn’t have come at a better time for India, a net importer of crude oil, and with the fisc under considerable stress. Over 80 per cent of the country’s oil needs are imported.

According to an analysis made by the State Bank of India, the nearly 30 per cent fall in crude oil prices could lower the petrol prices in the country by Rs 12 a litre and diesel prices by Rs 10 per litre. “However, both Centre and states may not be willing to do so, as it may impact their overall revenue projection for fiscal year 2020-21 given the fiscal constraints,” the report said.

The savings accrued from lower crude prices will translate into lower current account deficit (CAD)—the difference in inflow and outflow of dollars, easing of inflation and lower fiscal deficit which then naturally will push the economic growth.

India’s CAD for the October-December quarter of 2019-20 has already declined to 0.2 per cent of gross domestic product compared to 0.9 per cent in the July-September quarter, and 2.7 per cent in the corresponding period of the previous fiscal.

According to the Reserve Bank of India, the contraction was primarily due to lower trade deficit at $34.6 billion and a rise in net services receipts at $21.9 billion.

A report by Kotak Strategy noted that a large number of sectors and companies will also benefit from higher demand and profitability. Besides, this also provides the adequate room to the RBI to reduce interest rates—a move that is expected to spur demand.

Between 2018 and 2019, average crude oil prices increased from $56.43 a barrel to $69 per barrel. In 2018, global oil prices had breached the $70 per barrel level, raising concerns for the government..