Impact Of Increasing Oil Prices On Indian Economy

The latter will come true as more than half of India’s remittances will go through the Gulf countries, which are likely to see better economic conditions with higher oil prices. In terms of numbers, a $10-a-barrel rise in crude oil prices would increase spending on commodity imports by about $20 billion, offset in part by a $6-billion increase in oil exports and dollars in workers’ remittances. The cost of imports will be halved if the price of crude oil continues to hover around $30 a barrel. In addition, every $10 increase in crude oil prices has a direct impact on a country’s current account (CAD) deficit.

Thus, when crude oil reaches $85 per barrel, the oil deficit will rise to $106.4 billion, or 3.61% of India’s GDP. According to a report by the Reserve Bank of India (RBI), every $10/barrel rise in crude oil prices would lead to an additional deficit of $12.5 billion, equivalent to 43 basis points of India’s GDP. According to an analysis by the Reserve Bank of India, every $10-a-barrel rise in crude oil prices would result in an additional $12.5 billion deficit. Higher prices affect the current account deficit, which means that the value of imported goods and services exceeds the value of exports.

Changes in commodity prices can affect the economic ecosystem at all levels, from family budgets to corporate income and national GDP. Rising oil prices have a negative impact on several factors such as the stock market, currency, inflation, transportation and manufacturing sectors, and government spending. Rising oil prices will drive up the cost of energy, which, combined with the oncoming winter and increased commercial activity as the pandemic eases, will have a major impact on the economies of most countries of the world. India, which relies on imports for more than 80% of its fuel consumption and already has fuel prices above Rs 100 for both petrol and diesel in most cities, will be no exception.

Rising crude oil prices have helped lift the price of gasoline and diesel in India to record highs. High crude oil prices are the result of less drilling by shale gas producers in the United States, disruptions to crude oil supplies due to hurricanes in the Gulf of Mexico, and runaway fuel demand as the global economy stabilizes. -19 pandemic, which significantly reduced economic activity. With the global economic recovery following COVID-19, global demand for crude oil increased in 2021, driving prices up sharply. Crude oil prices have risen steadily since early 2021, when Brent crude traded at around $52 a barrel, fueled both by hopes of improved demand thanks to regional economic recovery and reduced supply from major oil producing countries.

Crude oil prices hit a two-year high, with Brent oil rising above $71 a barrel on Wednesday, reaching its highest level since May 2019, when major oil-producing countries announced they were joining plans to gradually increase crude oil production. World crude oil prices rose to their highest level in 13 months, driven by strong demand prospects amid a global economic recovery and supply disruptions in the Middle East. In February and March 2020, crude oil prices accelerated their decline in response to the coronavirus pandemic and the expected sharp decline in oil demand. The fall in prices is associated with an increase in supply due to hydraulic fracturing.

This was followed by price increases again since 2004, and this upward trend in the cost of oil continues to this day. In addition, since 1996 there have been high fluctuations in oil prices. If we look at the evolution of crude oil prices since the 1950s (see attached chart), price spikes have mostly been accompanied by geopolitical tensions or other factors. leading to a supply shortage.

Due to the pandemic, these oil-producing countries continue to slowly increase production, which leads to higher oil and gas prices. According to the IEA, oil production in non-OPEC Plus countries will increase by 710,000 bpd in 2021. 5.4 million bpd in 2021 and another 3.1 million bpd in 2022.

Since none of the largest oil-producing countries in the world is likely to increase oil supplies, experts predict that by 2019 the price could even reach $100 per barrel. Despite a 430% jump in Brent oil prices since March 2020, oil seems cheap. long term vision. Goldman Sachs expects Brent oil prices to exceed $80 on average in the third quarter of this calendar year, with peaks above that price; JP Morgan expects crude oil to top $80 in the last quarter of 2021, and Bank of America expects Brent oil prices to hit $100 by next summer.

Any rise in global crude oil prices directly affects India as the country imports over 80% of its oil. India paid over $110 billion for oil imports in 2017. Thus, if oil prices double within a year, a country’s import spending will also double over the same period.

Since India imports most of its fuel, it needs more dollars to buy crude oil, which results in liquidity being squeezed. This is bad news for India, which depends on imports for 85% of its crude oil needs and is the third largest importer of fossil fuels in the world.

Given India’s dependence on oil imports and the current pressure on the country, New Delhi is pushing OPEC to increase oil production to contain prices. Analysts say a rise in production by major oil producers is probably India’s biggest hope for a short-term solution, as some economists warn of the risk that crude oil prices could approach $100 a barrel by the end of this year. At the same time, oil-producing countries will be careful enough to maintain a balance in production so that prices do not collapse.

There will also be a significant impact on the Consumer Price Index (CPI) and the CPI inflation rate could be 5% in FY23 due to higher oil prices. The report predicts that rising oil prices could also lead to WPI-based inflation rates of 12% and 6% in FY22 and FY23 respectively. % of crude oil will lead to an increase in India’s Wholesale Price Index (WPI). by almost 0.9%.

An increase in oil prices by 15-25% within one year will affect the Indian economy in different ways. As a general rule, a $10 per barrel increase in crude oil prices would have a negative impact on the current account deficit of $10-11 billion (or 0.4% of GDP). Therefore, rising crude oil prices could increase India’s spending, thereby negatively impacting India’s budget deficit, the difference between total government revenue and total spending.