Crude Oil Rally, Falling Rupee Should Worry BJP More Than Karnataka Outcome

Business

oi-Sunil Fernandes

By Sunil Fernandes

Published: Monday, May 21, 2018, 8:53 [IST]

Petrol and diesel prices in select cities like Delhi have now reached historic peaks and inflation is fasting creeping in. In fact, for April 2018, Consumer Price Inflation surged to 4.58 per cent.

This is hardly the promise of "ache din" individuals were expecting, when the Narendra Modi government tookover.

There was much at stake for the BJP in the Karnataka elections, but, slowly that news is dyeing down as focus remains on rising fuel prices and a falling rupee.

A double whammy

For the BJP, the slow but steady rise in crude prices in the last few weeks is not good news. The Narendra Modi government has been fortunate to see crude oil prices dipping in the initial 3-4 years, when it assumed office.

But, as we draw near to key state elections and the May 2019 elections, we are seeing dangerous signs of oil price rising. Petrol price in New Delhi is now at Rs 76.57, which is a historic peak. The problem is that crude prices have been rallying and with it a drop in the rupee against the dollar.

Since we import crude oil and refine it is to petroleum products, a drop in the rupee only fuels a further increase in petrol and diesel prices.

So, it is has been a double whammy of sorts. On the one hand crude oil prices have rallied over $80 per barrel and on the other hand rupee has dropped below 68. There are worries that the current account deficit and the fiscal deficit, may now be impacted.

Tough task for the BJP led NDA

If crude prices continue to rally through the year and into the next year, it is going to be tough for the BJP government going forward.

All eyes should now be on the movement of crude. The recent decision by the Donald Trump administration to cancel the nuclear deal with Iran has led to the sharp rally in crude prices. If Middle East tensions escalate, we may see another round of crude rally. This is not going to be good news for the BJP government, after the setback received in the Karnataka state elections.

Of course, it has the option to reduce excise duty on fuel, however, that will push the fiscal deficit higher. Last time a Rs 2 excise on petrol and diesel was cut, the government estimated that the loss to the exchequer would be Rs 25,000 crores.

It's really a precarious position for the government, especially when you are not self reliant in crude production. A rally in crude prices and a falling rupee, do have the chances of impacting election prospects for any government, including the BJP.

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