Why India is sweating over oil prices, again

The worry: India’s oil minister has been working the phones in the last couple of days to convey his concern on rising crude oil prices amidst US-Iran tensions. In the last fortnight, he has spoken to the US energy secretary, Russia’s deputy prime minister, the UAE minister who is also the CEO of the country’s national oil company, & the Saudi energy minister for their help in keeping prices low.

The reason: After falling to the lowest level in almost five months in mid-June, oil prices have rallied over escalating tensions between Washington & Tehran that threaten to disrupt crude oil supplies. Crude prices kept rising on Monday following its biggest weekly gain since late 2016. The main crude oil contracts have risen by almost 10% since Iran last week shot down a US drone for breaching its airspace.

Acche Din threatened: A sharp decline in oil prices within months of Modi taking over as prime minister in 2014 had helped the government rein in inflation & cut its import & subsidy bills. Oil prices fell from $114.81 on June 20, 2014, to $48.79 per barrel on January 23, 2015. This was due to oversupply in the market. Prices fell further to $28 a barrel before a coordinated supply cut by key oil producers lifted rates.

It matters: India imports nearly 84% of its oil needs. Low oil prices bring down India's import bill which is good news for current account deficit (the difference between the value of our imports & exports). Every $10 per barrel increase in crude prices shaves off 0.4% of GDP by widening the current account deficit by $12 billion or so. Low oil price also means lower pressure on the rupee as we need fewer dollars to buy oil. Centre spends less on subsidising fuel & LPG prices & oil companies can cut petrol & diesel prices & help bring down inflation. The lower risk of inflation means increased room for RBI to cut interest rates. Having to allocate less money to oil means higher public resources for other welfare projects & schemes. That’s good news for politics too.

Oil & Budget: Risk of rising oil prices, on the other hand, is bad news for the finance minister, who will present her first Union budget on July 5 as oil prices threaten to squeeze the headroom for big-ticket spending when the government is gearing up to energise economic activity. Plus, she must allocate funds to schemes that help win elections.

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