Brent crude yesterday rebounded from a five-year low of USD 65, but commodity traders are expecting the weakness to persist near term. Back in India, the stock market has been cheering falling crude prices as it is helping cool inflation, reduce the oil import bill and improve the government’s fiscal books. But a sustained slide in oil prices may turn out to be counterproductive, warns Eswar Prasad, senior professor of trade policy at Cornell University, and senior fellow at Brookings Institution.
Excerpts from the interview to CNBC-TV18 on Tuesday:
“Right now if oil goes to USD 65 or even slightly lower it is not a big negative but it does imply that there is going to be a lot of weakness in external demand and countries in Latin America like Venezuela which already have a very difficult situation, emerging markets like Russia and of course the Middle Eastern countries plus some of the European economies like the UK and Norway that rely on oil exports to a significant extent are going to be facing fairly difficult situations.
This will affect their budgets and their current account balances which in turn will affect their consumption demand. So, softness in consumption demand is ultimately not good for anybody in the world including India. So, there is a point at which falling oil prices are not going to be a net plus even for India. I don’t think we are quite there yet but we are pretty close.”
According to Emkay Global's Dhananjay Sinha, the sharp decline in crude oil price will lead to loss of tax revenue and dividend payouts by oil PSU companies, which together will outweigh reduction in oil subsidy.
"Annual contribution of the Oil & gas sector to the exchequer of around Rs 3 lakh crore is much higher than oil subsidy burden," Sinha said in a note to clients last week.
"On an overall basis, every 10 percent decline in global commodity prices results in 600 basis points decline in gross tax collection & rise in the revenue deficit/GDP (States & GoI) by 110 basis points. Meeting the FY15 Budget estimate of 4.1 percent fiscal deficit/GDP would call for cuts in spending or raising taxes, thereby compromising growth," the Emkay note said.
India’s oil import bill for October fell 19 percent year-on-year, but there was bad news as well by way of lower exports. Exports contracted for the first time this fiscal, declining 5 percent year-on-year.
Most economists expect export growth for the rest of this year to be subdued because of the weakness in Europe, Japan and lastly China, which could try to export itself out of the slowdown it is facing. In addition, low crude prices are hurting oil producing countries, which in turn could further hurt global demand.
A couple of weeks back, Nigeria devalued its currency to offset reduced revenues from oil exports. This led to Bajaj Auto having to hike the prices of its motorcycles sold in Nigeria. Some analysts feel the move could hurt Bajaj Auto’s sales in that market, which accounts for around 35 percent of its export revenues.
Also read: Valuations high; US may see slowdown if oil falls further