Even as nations around the world are busy battling Covid-19, Saudi Arabia launched an all-out oil war on Sunday with the biggest cut in its prices in the last 20 years after a failure by OPEC+ to clinch a deal to cut production, owing to Russia's opposition. OPEC+ comprises of OPEC countries plus Russia. As a result, the oil prices crashed in global markets. However, the unprecedented phenomenon could, indeed, be a blessing in disguise for India.
Consider the macroeconomic indicators. As a country that imports more than 80 per cent of its crude oil requirements, a significant price change in crude oil has a direct effect on India's current account deficit (CAD). According to a report by Care Ratings, crude oil import bill during the financial year 2018-19 was around $112 billion and in the current fiscal, till January, it was $87.7 billion. Hence, if the oil prices continue in the lower range for over a significant period, it will reduce India's import bill and in turn, the current account deficit.
Every dollar per barrel drop in crude prices reduces India’s import bill by ₹10,700 crore on an annualized basis. Retail prices of petrol and diesel in India track global retail prices of these products, not crude, but are broadly linked to price trends in crude oil. However, it is to be noted that the CAD figures will also depend on rupee's value. The rupee is currently trading at a 17-month low of 74.17 against the dollar.
In addition, crashing crude oil prices might have an inversely proporational effect on Indian stock markets. As per industry observers, Indian equity markets have done well in the past, whenever there was a crash in crude oil prices. Currently, Indian markets are reeling under the twin pressures of coronavirus and Yes Bank scam.
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Lower oil prices will also mean lower inflation. With inflationary pressures easing, the Reserve Bank of India (RBI), which has been on a hawkish mode since December last year, will have some leeway to slash lending rates, more so with the government bond rates at an 11-year low. RBI's monetary policy committee (MPC) had put a screeching halt to its lending rate cuts in December owing to mounting inflationary pressures. A repo rate cut will imply less lending costs, which will result in a spurt in economic activity.
Apart from CAD and repo rate cuts, lower oil prices will also have a direct impact on state and Central governments' revenue figures. If the governments maintain the current levels of oil prices, it will help shoring up revenue. Both Centre and state governments earn a cut from petrol and diesel retail prices. In addition, if they pass on the cost benefits to consumers, it will directly translate to more money in people's hands. This will, indeed, improve consumption that has been low over the last few quarters.
At the same time, it is to be noted that the extent of the oil price impact will depend on how the government will manage the money.
India's economy had just begun to witness slight uptick after months of slowdown in February when coronavirus started threatening worldwide economic activities. Sectors such as pharmaceuticals and travel and tourism have began witnessing the global fallout of the zoonotic virus. However, if oil prices remain low over an extended period of time, it will help Indian economy offset the coronavirus hit it has taken.
