Higher oil price shadows India's growth prospects

Oil prices are now at a two-year high. Crude prices, which hovered around $50 a barrel at the start of 2017, have risen to $68—an increase of 20 per cent in one year.

Crude oil prices have rallied to the highest level since the Organization of Petroleum Exporting Countries (OPEC) and some non-members agreed to reduce oil output in January 2017. The prices are likely to touch 80-90 dollars per barrel within two years.

Thanks to the long period of slump in oil prices, India was able to manage its fiscal and current account deficits. Inflation was under control as the consumers benefited from lower import bill. This, coupled with an increase in capital inflow, bulged the foreign exchange reserve and the country's economy showed signs of improvement.

Now, the rise in global crude prices have started to reverse this trend. The sharp surge in petrol, diesel prices will push the Indian economy towards inflation.

Experts estimate that the rise in crude prices will significantly affect the economy of oil-importing countries like India. The country imports around 70 per cent of its crude oil requirement, accounting for nearly one-third of its total import cost.

The rising import bill—owing to hike in international crude prices—has started to impact the country's fiscal deficit. Industries that consume crude oil as main raw material will also be hit. A rise in oil price will negatively impact prices of all goods and services. Profit margins of a wide range of companies across sectors like refining, construction materials, lubricants, aviation, cargo, automobiles, tyres, cement and chemicals could be affected. Domestic equities and bonds are vulnerable to rising global crude oil prices. Surge in crude bill might prompt the Monetary Policy Committee of the Reserve Bank of India to hold the repo rate at the current level.

Why have the crude prices shot up beyond the target set by the oil producers? Voluntary production cut declared by the OPEC coupled with slower pickup in the US shale oil, have helped in stabilising oil prices faster than expected. While the energy requirements in the US have picked up, oil and gas production there have not picked up simultaneously.

This increasing demand and slow inventory are not just limited to the US. The International Monetary Fund is upbeat about a widespread faster growth. Manufacturing sector in China—the world's largest exporting nation—has showed signs of improvement. A severe winter has escalated the demand for heating oil in many countries. The growing global energy needs will continue to keep demand for oil on a rising trajectory, thereby helping the cartel members to ensure the prevailing pricing trend.