Economy

Please review

KEY POINTS

·         The price of oil has risen sharply in recent weeks.

·         The expectation in the market is that prices could remain elevated owing to several reasons such as

a)     Political uncertainty in Saudi Arabia, the world’s second largest producer of oil.

b)     The tightening of supply by the Organisation of the Petroleum Exporting Countries (OPEC).

c)      Drawdown in inventories, especially in the US.

Concern for India

·         As a large importer of crude oil, India benefited significantly from lower prices.

·         It helped contain inflation and had a favourable impact on both the fiscal and current account deficits.

·         Even though India is in a relatively strong macroeconomic position, a higher level of oil prices could still pose challenges for policymakers.

·         It has the potential to affect Indian economy in multiple dimensions as

a)     Growth

b)     Inflation

c)      Currency

d)     Current account deficit

e)     Fiscal deficit

·         Since the government raised excise duty when prices were falling, it could come under pressure to reverse the hike if prices continue to rise.

·         Lower revenue collection would result in lower public investments, which will affect growth.

·         Higher oil prices will also affect corporate India’s profit margins and could delay the much awaited earnings revival.

·         Expectation of higher inflation will reduce the chance of a potential rate cut and could affect market sentiment.

Cautions

·         Meanwhile, the government would be well advised to avoid reducing duty if prices remain at higher levels.

·         It would need higher revenue to push capital expenditure and move forward with fiscal consolidation.

·         It will be extremely important to keep fiscal deficit in control in order to protect hard-won macroeconomic stability.

Reason for increase:-

Upsurge caused by political uncertainty in Saudi Arabia

Tightening of supply by OPEC countries

Shale:-

The American shale industry has been left free to increase production in response to high price,thus capping on price of oil

 As India is a major oil importing country.increased shale production benefit INDIA now

Cautious step to be taken by government:-

As India is slowly recovering from impacts of demonitisation.the price rise in oil will affect India

Government should have sufficient forex reserve to meet the price fluctuation global market

As oil prices increase,transportation cost of consumer goods will increase.

So hoard activity takes place.government should try to stop it

It should regulate cost of transportation systems so that movement goods and people not affected

It should ensure to provide the basic food items through public distribution system effectively to reduce demand and price rise in free market

Central and state governments should reduce duties and taxes they impose on petroleum

CONCLUSION:-

India is a country with rich natural resources.government should encourage START UPS to discover new technology so that people rely on renewable energy like Solar,Biofuel,methane etc., which could be long term solution for not depending on other countries for oil....