Oil prices at record high; inflation and trade deficit set to worsen

INDIA-OIL-ENERGY-PETROL Representational image | File

With crude inching up to $78.5 per barrel, common man's woes are set to increase. They have already increased with petrol touching a record high of Rs 76.24 per litre and diesel at Rs 67.57 per litre. Petrol had last touched Rs 76 in September 2013.

After the latest increase, petrol is costliest in Mumbai where high local taxes have led to a price of Rs 84.07 per litre. In places such as Bhopal (Rs 81.83 a litre), Patna (Rs 81.73), Hyderabad (Rs 80.76) and Srinagar (Rs 80.35), petrol has breached the Rs 80 mark.

While the immediate impact has been on fuel budgets of households, analysts believe that it might stoke inflationary concerns leading to a hawkish stance from RBI in the upcoming monetary policy committee meeting. Moreover, this will also lead to widening of trade deficit.

"India’s trade deficit will widen to a four-year high of 6.4 per cent of GDP in FY19 (USD178.1 billion). In FY18, merchandise trade deficit stood at USD156.8 billion (6.0 per cent of GDP) on account of a rise in oil and gold imports. Widening trade deficit, escalation in commodity prices, particularly oil, coupled with the expectation of the US Federal Reserve raising its rate further, is exerting pressure on the rupee", said India Ratings in a report.

India's largest bank – SBI has also said that with every $10 per barrel increase in global oil price, India’s import bill increases by around $8 billion, GDP falls by 16 basis points, current account deficit goes up by 27 basis points and inflation rises by 30 basis points.

So, is it time for the Modi government to walk the talk (BJP had strongly pitched for an excise duty reduction when petrol prices were going up in Congress regime) on excise duty cut? Probably yes. But Oil minister Dharmendra Pradhan has not confirmed anything yet.

At a conference in Bhubaneshwar, Pradhan said, “The Centre is sensitive towards the rising fuel prices. Various alternatives are being explored. I hope something will work out soon".

Meanwhile, industry lobby group FICCI has also asked for excise duty cut to deal with oil price hike.

“Unless swift action is taken to address the situation, the economic growth will again head towards a speed-breaker. Amongst the most immediate actions that can be taken by the government is to bring down the excise duty on fuel,” said Rashesh Shah, President, FICCI.

When the global oil prices were down, the government had hiked excise duty on fuel nine times between November 2014 and January 2016, but reduced it only once in October last year.

Crude prices have been going up on account of US withdrawal from the Iran nuclear deal and sanctions that are expected to be imposed on Iran as a result. Venezuela, one of the major oil producing countries, is facing political and economic instability and has cut production. The OPEC has also cut production leading to a jump in global prices of crude.