GST & cash ban have hurt, but oil prices could be the straw that breaks the economy’s back

FILE PHOTO: A worker checks the valve of an oil pipe at the Lukoil owned Imilorskoye oil field near Kogalym, Russia, January 25, 2016. REUTERS/Sergei Karpukhin/File Photo

There’s no indication that this government is particularly superstitious, but if it were, it would be haunted by the belief that trouble comes in threes. As if demonetisation and GST were not enough to rock the economy, the country is now being visited by a demon that had chosen to stay away for the first half of the BJP’s term: high oil prices.

Market analysts and economists of varying expertise have used terabytes of memory space in writing about how the cash ban and GST have brought the economy to a three-year low and why things will only get worse before they improve. But the impact of oil prices could be just as crippling.

In the recent past the government has had to face criticism over rising fuel prices, which touched a three-year high even as international crude oil prices halved over the same period. The government took cover saying that fuel prices had increased globally. Now even that fig leaf has fallen. Crude oil prices have touched a 26-month high which can disturb all future planning.

Crude oil prices in the international market have shot up after Turkey said that it might cut crude oil exports from Iraq’s Kurdistan through its area. This move is expected to cut off nearly 500,000-600,000 barrels of crude per day from northern Iraq to the Turkish port of Ceyhan. This loss, combined with the 1.8 million barrel per day of supply cuts by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers, is likely to narrow the supply-demand gap, where demand is also building as major economies pick up.

These reports are naturally not something that the policymakers would like to read if they want a good night’s sleep. Low oil prices are what made the data emanating from the government look respectable. It was because of low oil prices that the twin deficits and inflation were under control.

A few days ago the government was hoping that the spike in petrol and diesel prices, which were on account of hurricanes in the US refining belt would come down as soon as supplies were restored. But even as US refiners limp back to normalcy, rising crude prices are casting a shadow.

The triple-whammy is hitting India just as some important states are going in for elections. The government might be tempted to eat its words and ask refiners to absorb crude price rises.

But if the refiners do not agree, the government would have to eat crow and reduce indirect taxes that it had increased to fill the gap from falling revenue on account of a slowing economy.

The government is fast running out of options and a rising crude oil price has closed some of them. But the biggest dejection is expected to come from the central bank, which may use rising crude oil prices as one more reason not to cut interest rates.

Trouble does come in threes. Perhaps the government’s economists, finding no conventional answers, should seek solutions in other superstitions.