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Editorial | December 2017

Crude prices: Brace up for impending storm

India has benefitted immensely from lower crude oil prices, which fell over 50 per cent in 2014 and 2015, till recently. It helped the government in handling of inflation and fiscal and current account deficits. It could give thrust to public investments, utilising the windfall of about 0.9 per cent of GDP from lower crude prices in terms of lower subsidy outgo and higher tax collection. Households and businesses benefitted from lower prices. <p></p> <p>There was a sharp reversal in crude oil prices recently. The benchmark Brent crude oil prices shot up about 34 per cent to about US$64.3/bbl in early-November 2017 from $48.0/bbl in end-November 2016, when the OPEC had decided to cut back on crude oil production. The rise was steep at about 22 per cent in two months - September and October 2017. Gas prices also rose by 16 per cent in tow as it is linked to crude prices.</p> <p>According to analysts, prices are unlikely to ease in near term, given OPEC plan to take it above $70/bbl. Oil prices have touched a peak of $147 in the past. A rise in oil prices redistributes global income from oil consumers to oil producers, with major impact being felt in emerging market economies, said Nomura in a recent report. It also said that India will be among the most affected countries, along with Philippines and Turkey, being an importer of 70 per of its oil consumption. </p> <p>Higher oil prices are expected to adversely impact trade, leading to weaker growth, higher inflation and rise in fiscal and current account deficits. Every $10/bbl rise in oil price is expected to reduce GDP growth by about 0.15 per cent, widen the current account balance by 0.4 per cent of GDP, widen the fiscal balance by 0.1 per cent of GDP and add about 30-35 basis points to headline CPI inflation.</p> <p>On the domestic front also the options for handling this situation are limited. In the wake of sharp rise in crude oil prices, the government had cut the basic excise duty on petrol and diesel by Rs.2/litre in October 2017, which is estimated to bring down the Centre's excise collections by Rs 13,000 crore in the second half of 2017-18. If it resorts to the same tactic in future, them it is likely to impact its revenues and put pressure on fiscal position, more so, due to rising subsidy burden on domestic LPG and PDS kerosene as well. </p> <p>For industry and consumers, it will come as a crude shock with a steep rise in logistics costs and rise in prices across commodities, impacting both CPI and WPI with a lag. </p> <p>On the positive side, high crude prices could boost capital expenditure in exploration and production of crude oil in the country, mainly from private sector, which stayed away from fresh upstream investments. </p> <p>Though the situation is not alarming for India as yet, the government has to prepare a blueprint for countering the impact of high crude prices in future. Reforms momentum should not be allowed to slacken at any cost. Keeping fiscal deficit in control and maintaining the macroeconomic stability should be top on its priority. For this purpose, the government should avoid slashing excise duty on petroleum products, if need be. </p> <p> Follow me on twitter @PratapPadode</p>
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