Rising oil prices could impact India's budget math

Rising oil prices could impact India's budget math

Representative image. Reuters photo

There is a 12% uptick in global Brent crude futures after Saudi Arabia's largest oil processing plant Aramco attack on Saturday. It is selling at $67.20 a barrel. The exceptional rise in crude prices has the potential to disrupt global economic growth. And, India, which is heavily dependent on crude import, can just not afford a price rise at a time when its economic growth has plummeted to a six-year low. Though Aramco has promised an Indian refiner it would deliver crude from other sources and had adequate inventory. The fact that Aramco has lost half of its production capacity after attacks, oil consumers across Asia are bound to get impacted sooner than later. 

Oil ministry sources said the government is watching the situation and would ensure high oil prices do not impact the common man but oil analysts said how quickly Saudi Arabia gets back it refinery into operation would be the key to any near term development on the price front. Supply disruption is set to increase petrol and diesel prices in the coming days.

Considering that Saudi Arabia is the second-largest supplier of crude oil to India, any disruption in supplies could impact the country's Budget math and prolong its slowdown. India imported 36.8 million tonnes of crude oil from Saudi Arabia, accounting for 16.7% of total imports in 2017-18.

As the first round impact on India, high crude oil prices threaten to raise commodity prices across the board and stoke inflation, which is way below the Reserve Bank of India's mid-term projection of 4%. Later it could hurt earnings growth of companies and finally, India’s overall economy as the country, which imports 80% of its total consumption, is among the most vulnerable economies to rising oil prices.

The rising inflationary pressures may also prompt the RBI to slowly withdraw its interest rate cuts. The central bank has given 110 basis point cut in key interest repo rate since the beginning of the calendar year.

A back-of-the-envelop calculation suggests that every dollar rise in crude prices increases India's import bill by $1.5 billion and every $10 rise impacts the economic growth of the country by up to 40 basis points. India's economy has slowed to a 6-year low of 5% in the April-June period of 2019-20 and the country can ill-afford to grow lower than 8% if it wants to be a $5 trillion economy by 2024-25.

The oil price assumption for 2019-20 Budget has been between $70-$75 per barrel. A spike from this level could jeopardise Finance Minister Nirmala Sitharaman's fiscal math and also put undue pressure on the current account deficit. On an immediate basis, the oil increase can also negate the government's stimulus announced in the past month. The finance minister has announced Rs 70,000 crore relief to exporters and the real estate sector in the past as many days besides promising a host of bank mergers. 

The bad news on oil prices came just at a time when the market had started rallying up. However, the latest incident has impacted all major oil companies' share in the morning trade.