The sharp slump in global oil prices would work in favour of India, moderating inflationary pressures and reducing the energy import bill of the country—a net importer of crude oil, experts told Moneycontrol.
Crude oil prices hit a four-year low on April 9 as benchmark Brent fell below $60 per barrel, triggered by the recent trade war escalation between the two biggest economies of the world—the US and China.
Lower crude oil prices would give the state-run oil marketing companies (OMCs)--- Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL)-- the headroom to cut retail fuel prices, which have been left unchanged despite sinking oil prices. The OMCs have cited high volatility in crude oil prices in keeping pump prices unchanged.
“Primarily, the downward trajectory in crude prices tends to moderate inflationary pressures across the economy. This occurs through direct reduction in prices of petroleum products in the consumption basket and indirectly through lower input costs across manufacturing and logistics sectors,” Rishi Shah, Partner, Grant Thornton Bharat, told Moneycontrol.
“Concurrently, the fiscal position tends to improve with overall lower subsidies and possibly similar level of tax collections. Additionally, decreased pressure on the trade balance supports stability in the Indian currency, contributing to overall macroeconomic resilience," added Shah.
Announcing the excise duty hike on petrol and diesel by Rs 2 per litre on April 7, Minister of Petroleum and Natural Gas Hardeep Singh Puri hinted at the OMCs’ capability to take a decision on reducing petrol and diesel prices.
India’s energy import bill would also reduce with declining crude oil prices as the country is dependent on imports for over 85 percent of its total crude oil requirements.
"Given our large import bill, a drop in oil prices reduces the current account deficit by 30bps for every $10 decrease in oil prices," Sakshi Gupta, Principal Economist, HDFC Bank, told Moneycontrol.
Crude oil trajectory
Experts believe that oil prices would continue to remain below $75 per barrel in the medium term amid intensifying global trade war and oversupply in the market. Despite lower prices, the Organisation of Petroleum Exporting Countries (Opec) and its allies, commonly known as Opec+, has decided to raise combined crude oil output by 411,000 barrels per day in May, further dragging crude prices.
“Opec+ has announced production increase from May onwards, which is also pressuring oil prices. The EU and China have announced retaliatory tariffs. If this escalates further, prices would go down further,” said Prashant Vasisht, VP & Co-Head, Corporate Ratings, ICRA.
Lower crude prices would also aid government in raising funds, spurring the economic growth of the country.
“Lower crude oil prices, combined with the non-reduction of pump prices of fuel, also help in shoring up revenues for the central government by way of additional excise duties. This allows the government fiscal headroom to undertake more public expenditure, if and where needed, that has positive externalities on economic growth as well as lowering of yields, as the borrowing requirements of the government goes down," Ranen Banerjee, Partner, PwC India, told Moneycontrol.
While increasing the excise duty on petrol and diesel, the government said the funds would be used to compensate oil companies for the under-recoveries incurred by them on sale on LPG cylinders.
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