Why falling crude prices is good news for India?

Updated: Thursday, March 7, 2013, 17:53 [IST]

In all the melee and turmoil across the globe, oil prices have dipped gradually – good news to all oil consuming nations, particularly those like India, which import substantial quantities.

Brent Crude has fallen from its recent high levels of $126-127 a barrel, to the current levels of $112.

Why India should pray for a further fall?

Rising crude prices is perhaps the single biggest factor in causing havoc with an economy like India, since we import 70% of crude oil.

What rising crude oil prices does in the Indian context is that it causes the fiscal deficit to rise, since India subsidizes diesel and LPG. Petrol though deregulated by the government and aligned to market prices, may not often get the government's nod for a hike, due to political compulsions. This increases the fiscal deficit and puts a severe strain on government finances.

The fiscal deficit in India is estimated at 5.9% of GDP and in a big measure we should thank oil subsidies along with fertilizer subsidies for such a high figure.

What also happens is when oil prices keep climbing they put pressure on the trade deficit, which puts pressure on the current account deficit and hence the rupee.

Also, when crude prices rise, the government has to hike petrol prices, which increases inflation in the economy. If inflation increases, interest rates increase, as the RBI is forced to hike repo rates. As interest rates rise, the investment climate takes a beating and hence economic growth rates dip.

Oil prices have a big impact on fiscal deficit, current account deficit, falling rupee, inflation, interest rates and economic growth rates. It's a convoluted issue alright, but important nonetheless.

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