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The fading benefits from lower crude oil prices

LiveMint logoLiveMint 08-09-2017 Pallavi Pengonda

The Indian government gained immensely in fiscal years 2016 and 2017 from lower crude oil prices, while the overall economy gained too.

But that bonanza is history now. Crude oil prices have risen substantially from their lows. Cast your eyes on chart 1, which shows the movement in the Indian basket of crude prices in rupee terms at the beginning of every quarter since 1 April 2016. Prices show a sharp year-on-year increase in January and April 2017.

Needless to say, this is likely to have an adverse impact on gross domestic product (GDP) growth, which dropped to 5.7% in the June quarter from 6.1% in the March quarter.

Note that diesel prices for the consumer too are nearly showing the same trend (chart 2), which means that there could be a hit to demand growth, while inflation too could edge higher.

What’s more, the outlook on oil demand appears to be stronger, what with the economies of the US, Europe and China faring better than before.

What offers some leeway in this scenario is that, as we enter into 2018, the base effect will come into play, meaning that the incremental rise in crude oil prices will not be as sharp.

That is also helped by the common consensus that oil prices aren’t expected to rise beyond $60 a barrel (this too is a stretch according to some), as US shale oil production is expected to keep the global oil markets in a glut, which will exert downward pressure on prices.

Tushar Arora, senior economist at HDFC Bank Ltd, says demand-side pressure on crude oil shouldn’t come back even early next year. “We expect current account deficit to deteriorate marginally to 1.2% of the GDP for financial year 2018,” says Arora. While crude oil prices are one contributing factor, Arora expects non-oil and non-gold import demand to improve along with some improvement in gold demand. These factors will collectively have an adverse effect on GDP growth this year.

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