Impact of increasing oil prices on Indian Economy

Higher crude oil prices will adversely impact the twin deficits of current account and fiscal, which will have spillover effects on monetary policy, consumption and investment.
Rising crude oil prices have contributed to petrol and diesel prices rising to record high levels across the country.

Brent crude rose above $71 per barrel on June 2021, the highest level since May 2019, after key oil-producing countries stated that they will stick to plans for a gradual rise in crude oil production. We look at what’s driving increasing crude oil prices and how it’ll affect Indian customers.

Why do fuel prices go up?

Fuel production has decreased on the international market, and oil-rich countries are looking for bigger earnings. As a result, consumers in consumer countries face higher fuel prices. Nearly 80% of India’s crude oil needs are met by imports. As a result, the country bears the brunt of rising fuel prices. Furthermore, the increasing rate of global industrialisation has resulted in an increase in fuel demand and consumption.

Aside from the cost of refining, fuel sales are subject to federal and state taxes. Fuel taxes are the largest contributor to state coffers. Fuel sales are also expected to make a substantial contribution to the central government’s annual budgets. As a result, despite numerous pledges, neither the state nor the federal governments want to lower their revenues. When freight charges and dealer commission are included in, the total cost of fuel exceeds the base price.

Global demand for crude oil has been consistently on the upside. Consumption of energy has gone up thanks to advancements in technology. People across the world are relying more on gadgets and other electronic devices for daily use. E.g., A couple of decades back, mobile phones were a luxury, and only the privileged could afford one. Today the cell phone penetration is so high that 5.22 billion unique people across the globe charge their phones every day.

Geopolitical tensions add to the spike in global oil prices.  A war-like scenario increases the demand for fuel, and hence prices could spike.

India’s fuel use has also increased in recent years. Indians are spending more on vehicles and electronics as their population grows younger and their per capita income rises. As a result of the increased consumer demand, fuel costs have skyrocketed.

Since 2014, the Indian government has deregulated fuel prices. Fuel prices are now directly linked to the international price of crude oil under the new deregulated method. Consumers should have been relieved, as worldwide crude costs had dropped dramatically in India last year. Despite the substantial drop in pricing, the selling price of gasoline has remained same.

This was largely due to the government’s decision to raise both federal and state taxes. The government’s decision negated the benefit of lower crude prices for end consumers. In the end, consumers had to suffer the brunt of the higher taxes, and despite a drop in worldwide oil prices, they had to pay higher costs for gasoline and diesel.

An increase in the price of oil is bad for many economies. For instance, let’s consider the effects on the Indian economy

1. High Import Dependence

India is a country in the process of evolving. As a result, they consume a great deal of energy. In addition, India does not have its own oil reserves. As a result, more than 80% of its oil needs are met by imports. As a result, if oil prices double in a year, the nation’s import cost will double as well. In the year 2017, India spent about $110 billion on oil imports. Even if the exchange rate remains steady, this figure is expected to double.

2. Exchange Rate Woes

The Indian rupee has already fallen in value versus the US currency. This is due to people attempting to exchange rupees for dollars. The government will be forced to convert rupees for dollars if the price of oil rises. The rupee would be under great pressure due to the fact that the import bill will be treble that of last year. The rupee’s value will plummet even lower as a result of this. The government would be forced to sell even more rupees as the rupee’s value falls. This will eventually result in a vicious cycle that will bring the economy to a standstill.

3. Discretionary Spending

The Indian consumer is paying a premium for higher petrol prices. On the one hand, their earnings are stagnating as a result of the market’s crisis in various businesses. A surge in fuel prices, on the other hand, is eating up a significant chunk of their income. Inflation is on the rise as a result of rising fuel prices. As a result, their discretionary expenditure has decreased. As a result, the vicious cycle that has previously been stated in this text is exacerbated.

Fiscal Deficit

The government’s plight is likely to be exacerbated by the spike in oil prices. Every $10 increase results in a $10 billion rise in the current account deficit. For every $10 increase in oil prices, the economy shrinks by around 0.5 percent. As a result, the government, like the people, is dealing with a double whammy.

As a result, rising oil costs have been identified as one of the most serious dangers to India’s economy.

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