Falling Global Oil Prices and Impacts on India: Analysis

India is likely to benefit from this fall. Key points are discussed below:

On Exchange Rate

The drop in crude oil prices substantially cuts India’s oil import bill. This helps to reduce demand of foreign exchange and this boosts foreign currency reserves. As the demand for foreign currency is low, this may also appreciate domestic currency Rupee against Dollars. This in turn will improve exchange rate of domestic currency against foreign currencies.

On Inflation

Petrol and diesel prices in India are now decided by the market price of crude. The fall in prices is likely to lower these prices in the market. This will bring down the energy costs and transport costs. This will overall result in lower inflation in goods and services, especially food items. Low inflation also helps to improve the investment scenario in the country. Reduction in inflation will prompt central bank to reduce key policy rates, thus increase liquidity in the market and boost economic growth.

On Current Account Deficit

Every $1 decline in crude prices brings down the current account deficit by about $1billion. The nearly $10 per barrel decline can therefore drive a substantial improvement in the current account.

Fiscal Deficit

Low prices of crude will in turn bring down fuel subsidy bill of the government, thus giving it a room to mobilize resources to some other priority sector or for social development.  Government is also trying to boost its finances through disinvestment, savings on fuel prices will add to revenue.

In summary, the lowered crude oil prices will help the government to achieve its targets related to Low Inflation, Low fiscal deficit and CAD.

What should be done by Government?

India has all reasons to be pleased as the oil trends will spell a huge improvement in current account deficit, correct the government’s balance sheet and also tame inflation considerably. The government has to maintain a smart balance between cutting and retaining different subsidies for diesel, liquefied petroleum gas, kerosene etc. It has to free space for expenditure on infrastructure, education and healthcare. So the subsidies on fertilisers will have to be rolled back which will need a lot of political capital. Prudent supply-side reforms have also to be fitted in well in the growth story so that the government’s performance in the elections in two major states in India does not take a hit.

Likewise China has to act smart as contrary to India it is facing a slowing economy. The government is trying to plug the gap by speeding the $1.1 trillion infrastructure projects. However, cheaper oil should not serve as an incentive to reduce carbon footprints but a smooth transition to energy-efficient fuels. China has to work on its state-owned enterprises as the Central Bank can now comfortably cut the key interest rates.  At the same time, it has to work to boost its private sector which is more productive and efficient. China has worked on building its strategic energy reserves but it will have to work harder to overcome the structural challenges to revamp the economy.