Falling crude oil prices results in higher GDP growthIndian  basket crude oil price on January 21 trading day touched USD 45.30 or Rs 2,790.93  per barrel at an exchange rate of Rs 61.61 per dollar. It indicates that the downward trend is continuing. It means India’s import bill which is largely driven by crude oil will come down. The country  imports about 70 percent of its petroleum needs. A sharp decline has helped India in taming inflation and made room for the Reserve Bank of India to cut the interest rates marginally. The interest rate cut has cascading effect for the Indian economy. Falling oil prices would certainly help in taming inflation, better management of  fiscal and current account deficit and higher GDP growth rate.

Inflation

High inflation is a big concern. Oil  products share heavy weightage in the wholesale price index (WPI), thus the impact of lower oil prices is considerably higher on overall inflation. Lower oil price directly impacts 8.6 percent of the WPI basket (crude oil). Lower prices also help in bringing down prices of chemicals which need oil as input. It is estimated that every USD 10 per barrel fall in crude oil price would  bring down WPI by around 0.5 percent. With falling prices inflation is within manageable limit. Therefore, the RBI diluted its hawkish stand and cut interest by 25 point bps, a much awaited move.

GDP growth

The trade deficit and the current account deficit are two big worries for the Government.  With oil price going down the Government will have more money in hand to increase expenditure in several sectors thereby fueling demand.  That will certainly lead to a higher stage of advancement. So to say, a sharp fall in crude oil prices is expected to help India to achieve a higher GDP growth rate. It has certainly reversed the mood of gloom in India in terms rising prices of commodities.

From 4.7 per cent growth in 2013-14 and  nearly 5 per cent growth in current fiscal, it is expected that it will go beyond 6 per cent simply because of oil price crash. Indian economic conditions are bit different and ours is an import-driven economy. Paradoxically, rather than riding on the commodity boom, our economic growth rides on the bust.

Lower oil prices should boost growth which in turn will push up households’ real disposable incomes and consumer demand. Once demand is up, corporate profit will go up as their input costs would be lower because of low oil prices. According to analysts of the sector, every USD 10 per barrel fall in oil price can boost GDP growth by around 0.1 percentage points.

Subsidy factor

In 2013-14, the oil subsidy Bill was around Rs 1.3 lakh crore. Now, the Government is planning to exempt upstream oil companies like ONGC and OIL from sharing the subsidy burden as long as international crude price stays below the $60-a-barrel mark.

For downstream companies like IOCL, HPCL, BPCL, it is estimated that under-recoveries would be around Rs  78,000 crore during the current financial year, of which Rs 51,000 crore relates to the first half when the oil price was a bit higher compared to present rates. Lower oil prices also lead to restructuring of subsidy-sharing formula with all oil companies. Very soon,  a new mechanism is expected.  Moreover, it is expected that given the condition with regard to oil prices, the Government would only require nearly Rs 40,000 crore for oil subsidy. It can be easily concluded that how much a saving of nearly Rs 1 lakh crore crore would help in taking the Indian economy forward. It will help in lowering fiscal deficit to 4.1 per cent of GDP as targeted and the Government will have more resources to increase public expenditure and investment during the next fiscal.

To hit oil exploration & producing companies

Declining crude prices will hit oil exploration and producing companies adversely. If the trend continues, it will lead to cut in capital expenditure of oil companies due to lower profit.  It is estimated that lower crude oil prices would adversely  impact profits of crude oil producers in India and the operating profit of Cairn India, ONGC, OIL and RIL is likely to be reduced. Morevoer, cash generation of overseas ventures of ONGC Videsh, OIL and Reliance Industries would also likely decrease considerably.

The way forward

For India, a crude oil price would  certainly be helpful. It would support in better management of macroeconomic management. It would further help in bringing down prices of commodities and provide further room for the apex bank to cut interest rate to  increase credit flow to the industry at affordable cost. It also gives the Government an opportunity to spend for social sectors along with fiscal consolidation. India benefiting from a lower crude oil price is not an incorrect conclusion. The crude oil prices are expected to remain at low levels in the near-term, even if it recovers  over the next 1-2 years with slower production growth and demand recovery, by that Indian economy will be on strong footing.