What is the issue?
The rising oil price trend is likely to have repercussions on the overall economy, which calls for concerted government actions.
How has oil price been?
- Brent crude oil is the international benchmark price for oil.
- Brent crude was ruling near $120 per barrel in the mid-2014.
- The prices fell to a low point of $29 in January 2016, before climbing back up.
- A year ago, the price had crossed $50, and by December was over $60.
- In May, 2018 it crossed $70, and is now past $80.
- It is highly expected to cross $100 once the U.S. sanctions on Iran kick in, and reach as high as $120 in 2019.
How have past oil price shocks been?
- Oil price shocks in the past have mostly derailed the Indian economy, usually in conjunction with other factors.
- It happened in 1973-74, when the international crude oil price doubled in a year of poor harvests.
- India’s inflation rate rose sharply as growth tumbled.
- The second oil shock, of 1979-80, saw oil at $111, which along with another bad harvest caused GDP to shrink by a high 5%.
- The third was during the first Iraq war when average price for 1990 was only $43.
- But it tipped the country into the foreign exchange crisis of 1990-91.
- The oil shock of 2008 (average price of $104) came with the financial crisis of the same year, the combined effect causing a sharp dip in GDP growth.
- Oil prices stayed high through 2011-14, at over $90, causing the country’s current account gap to leap to 4.8% of GDP in 2012-13.
- Also, growth plunged to the lowest levels in a decade, and the rupee crashed down.
What could now be the implications?
- Along with oil price rise, the rupee has fallen against the dollar in the interim, and taxes increased.
- The petrol and even diesel prices could thus likely be headed for the three-figure mark.
- If the prices keep increasing as predicted, India will be back where it was years back.
- The trade gap, inflation, rupee’s external value and economic growth could all come under pressure.
- The current account deficit, already projected in danger zone at close to 3% of GDP, could further worsen and make rupee the same.
What is the way ahead?
- If the government eases consumer pressure by lowering taxes on petroleum products, revenue loss will affect fiscal numbers.
- If inflation climbs and RBI sticks to its inflation target, higher interest rates will constrict both investment and consumption, affecting growth.
- Keeping Iranian oil exports going will moderate price spikes, and therefore the size of the oil shock.
- So the policy choice is whether to continue buying oil from Iran as it is the Iran sanctions that are expected to send oil prices higher.
- But the challenge is that it could invite US sanctions.
Source: Business Standard
