OPINION: Crude oil set to disturb India’s

macro maths: How bad can it get?

RBI estimates that for every $10 a barrel rise in oil price, GDP growth reduces by around
0.15%.ET CONTRIBUTORS | October 21, 2018, 08:00 IST
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By DK Aggarwal

The unwelcome combination of rising oil price and a weakening rupee is giving a tough time
to investors, especially when the whole world is looking towards India as a ‘growth engine’.
Now the billion dollar question is: will the rally in crude oil prices continue?

Current account deficit is another concern. As per an SBI Economic Research report, Indian’s
CAD could cross 2.5 per cent of GDP in FY2019 (provided oil prices continue at $80 a barrel
level). Currently CAD is estimated at 1.9 per cent for 2017-18.

RBI estimates that for every $10 a barrel rise in oil price, GDP growth reduces by around
0.15 per cent. If fiscal and current deficit widen, it is going to affect macroeconomic
mathematics. The strengthening of the dollar index is putting extra pressure on payment bill.
In the international markets, crude prices increased by 28 per cent, while our weak currency
turned crude oil 48 per cent dearer.

This is evident from the table below.

Source: SMC Reuters

Production cut by OPEC and some other countries over the past few years has squeezed
supplies and an increase in US production has been nullified by the demand growth
worldwide. The rise in dollar index has made crude dearer for importing countries, as they
pay in dollar. India’s dependence on crude import rose from 77.3 per cent in FY2014 to 83.7
per cent in FY2018, making the situation more severe. In three years time, crude prices has
risen from $25 a barrel to above $75 a barrel, and this is seen as a serious threat for India,
which is the third oil largest importer worldwide.

However, it is expected that crude prices will not sustain at higher levels for long, as the
market is not so much supply squeezed. The market is overreacting to the imminent sanctions
on Iran from the first week of November.
Some countries are prepared to bridge the supply deficit which will get created after Iran
sanction; Iraq is planning to increase oil exports from its southern ports to 4 million barrels a
day (bpd) in the first quarter of 2019. Global growth forecast has been cut down to 3.7 per
cent from 3.9 per cent for 2019, which should lower oil demand. The US is pumping more
oils, which may calm down the prices to some extent.

On the flip side, a sharp fall is also not expected as there have been supply disruptions in
Libya, Venezuela and Iran and Opec’s spare capacity at 2 million barrels a day is not of use
because of political dispute. Winter is approaching and heating demand will prevent any
sharp drop.

For the Indian government, bringing fuel under the GST will reduce government revenue by
nearly Rs 2 lakh crore. If the government goes with this, it would be a courageous haircut. If
the Asian premium which India, Japan and China are paying to Opec reduces, it may save $3-
8. However, it looks difficult at this juncture. The upside is capped at $85 and once the Iran
issue is resolved, prices will come down to $68 -65 levels.

(DK Aggarwal is Chairman & Managing Director of SMC Investments & Advisors)