effects of rising crude oil prices on the Indian economy

everyone so concerned about crude oil prices .That’s because the global crude oil prices have
been steadily rising over the past few months. For the first time since 2014, the international
benchmark for global oil prices crossed the $80/barrel mark in May 2018 . Compare this to the
$29/barrel price during early 2016! This sudden surge in prices has a great impact on various
segments of the Indian economy.
Higher prices: adverse impact on fiscal deficit:
India imports 1.5 billion barrels of crude oil each year . This comes up to around 86% of its
annual crude oil requirement. So, the surge in crude oil prices could increase India’s
expenditure, thus adversely affecting India’s fiscal deficit - the difference between the
government’s total revenue and total expenditure. Fiscal deficit indicates the amount of
money the government has to borrow to meet its expenses. A rise in fiscal deficit could
negatively affect the economy as well as markets. The fall in crude oil prices was a major
contributing factor in the reduction of India’s fiscal deficit between 2014 and 2016, according
to a report by Livemint . A few years back, we explained the impact of a falling crude oil price
on fiscal deficit. To know more, click here.
 Impact on the rupee:
The rise in crude oil prices has a clear impact on the Indian rupee. On 24 May 2018, the
rupee closed at 68.34 against the US dollar. This is a near 18-month low for the rupee, and
only 0.6% away from its all-time low of 68.825, according to a Livemint report . In addition, if
crude oil prices remain at these high levels, the rupee is further expected to depreciate by
the year end. Rupee depreciation has a reverberating effect on the Indian economy and even
the stock market. To arrest the rupee’s fall, the RBI often takes a few steps.Here’s a look at
how the RBI defends the falling rupee.
 Impact on Current Account Deficit (CAD):
India’s dependency on crude oil imports has only been increasing over the past few years.
The dependency rose from 77.3% in FY2014 to 83.7% in FY2018. The rise in crude oil price
has a big impact on the Indian Current Account Deficit (CAD). CAD is a measure of India’s
trade where the value of goods and services imported exceeds the value of goods and
services exported. CAD essentially indicates how much India owes the world in foreign
currency. An SBI report suggests that Indian’s CAD could cross 2.5% of GDP for FY2019
(providing oil price continues at $80 per barrel). Currently CAD is estimated at 1.9% for 2017-
18.Widening CAD further puts pressure on the rupee’s value as well as the rest of the
economy.
 Impact on Sensex, midcaps:
The Indian stock markets have faced a lot of pressure due to the rise in crude oil prices.
Between 1 and 24 May, 2018 alone, the Sensex fell by 2.3%.In comparison, the BSE small cap
and mid cap indices have had it worse with a drop of nearly 8%. With crude oil prices
touching $80 per barrel, there has been a sell-off in small cap and mid cap stocks. Analysts
warn that this could continue if the crude oil price continues to rise.Here’s what you can do.
 Impact on stocks:
A lot of Indian companies depend on healthy crude oil prices. This includes tyre, lubricants,
footwear, refining and airline companies. The profitability of these companies is adversely
 affected due to higher input costs. This could negatively impact stock prices in the near term.
On the other hand, oil exploration companies in the country could benefit from a rise in oil
prices.
 Impact on inflation:
Oil is a very important commodity and it is required to meet domestic fuel needs. And in
addition to that, it is a necessary raw material used in a number of industries. An increase in
the price of crude oil means that would increase the cost of producing goods. This price rise
would finally be passed on to consumers resulting in inflation. Experts believe that an
increase of $10/barrel in crude oil prices could raise inflation by 10 basis points (0.1%).

https://www.kotaksecurities.com/ksweb/Meaningful-Minutes/6-effects-of-rising-crude-oil-
prices-on-the-Indian-economy

According to GoodReturns.com report, here's a list of six factors that impact petrol and diesel
prices.

Cost of Crude Oil

Any change in international crude oil price has a direct influences on the price of crude oil in the
domestic market. This is the most important factor responsible for any rise in petrol prices in
India.

Increase in international demand, low production rate and any political unrest in the crude oil
producing countries of the world severely affects petrol price.

Increased Demand
Economic growth in India and other developing countries has also led to the increase in
demand for oil and other essential fuels in India.

The number of people who own private vehicles has gone up in the recent past which has
contributed to the increase in demand for petrol in India; this has resulted in the hike in petrol
prices in India.

Mismatch of Supply & Demand

In order to meet the demands of the market, Oil refinery companies in India face problem as
the cost of input price of crude oil is high thus resulting in less supply and more demand for
petrol in the country.
An increase in supply results in a decrease in the price of the petrol and vice versa.

Oil refining and marketing companies maintain crude oil inventory up to six weeks, which also
influences the price of the petrol and petroleum products.

Tax Rates
The prices of petroleum products varies according to the local government policies which
impose taxes on fuels.

As and when the government of India raises tax rates on fuels the oil companies in India also
increases the price of the petrol to recover losses and maintain marginal profits in the oil
business in India.

Rupee to Dollar Exchange Rate

The rupee-dollar exchange rate is also one of the major factors which influence the price of
petrol in India.

Indian oil companies pay to the oil imported from other countries in terms of dollars, but their
expenses are in rupees. So, when rupee rate plunges, you have to pay more for the USD.

Logistics
Logistics is one of the significant factors in pricing retail fuel. Petrol and diesel transported to
longer distances to cities or regions farther from depots will be priced higher than the places
nearer to the oil companies storage area.

The reason behind the change in the prices of petrol in different cities across India.

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https://www.zeebiz.com/india/news-petrol-diesel-at-new-heights-these-6-factors-impact-
indias-fuel-prices-62760

Introduction:
Diesel and Petrol are strategic commodities; they play a vital role in the socioeconomic
development of a country. Any uncertainty about their supply can impact the functioning of
the economy. In order to reduce this uncertainty it is important to plan and use the
resources judiciously. But, before planning, it is essential to understand the consumption
pattern of these products.

Energy is the lifeblood of economy of a nation. How the overall role energy can play in the
economy of a nation and how it serves as the mainspring of economic growth do not need
explanation.
Export of Petroleum products & Indian Crude Oil Production by Region

India is the sixth largest exporter of petroleum products in the world amounting to $60 billion annually. Thus any decrease in
crude prices adversely affects the exporters. Any decline in exports is a bad news for India’s current account deficit as it again
creates imbalance between India’s balance of payment.

Though Manufacturing Industries benefits from drop in Input costs and country benefits from improving CAD and fiscal math
still overall the major trade partners who imports petroleum products from India may refrain from buying as it not being cost
accretive for them as rupee and dollar both remain strong.

Many countries have put import curbs to save their economy thus any further decline in imports due to declining crude oil would
be a deterrent for India’s exports. Thus only Oil marketing companies and manufacturing industries benefits from crude price
decline as it increases their bottomline. Thus India remains neutral to any fall in Crude price. The Industries that stand to gain
from it are Paint, Tyre, Airlines, Plastics, Oil and lubricants etc.

Government is working to reduce its dependence on crude by 50% thereby working towards improving India’s CAD, Fiscal
deficit and economy as a whole in next ten years. Thus it’s focusing more to explore its Crude Oil Producing regions which can
going forward reap benefits for the nation as a whole. If the going goes smooth India may see a silver lining going ahead both in
terms of Crude Imports and strong Currency.

I. INTRODUCTION Energy security is crucial for both sustaining high economic growth and
controlling inflation. With rapid economic growth, energy demand in India has been rising
rapidly, and India is now the fourth largest consumer of crude oil in the world. Unfortunately,
India has to import most of its oil requirement, leading to severe pressure on the economy
when the oil prices rise. Thus, estimations of crude oil demand and projections for the future
should be useful to policy makers in making appropriate supply arrangements for the future.
There are many different sources of energy consumption, such as coal, crude oil, natural gas,
hydroelectric, solar, wind, and nuclear energy. Out of India‘s total energy consumption,
crude oil accounts for 24 per cent, natural gas 6 per cent, coal 40 per cent, combustible
renewable and waste 27 per cent, hydroelectric power 2 per cent, and nuclear energy and
wind energy about 1 per cent each; solar energy has an insignificant share. Thus, crude oil
and coal account for about two-thirds of India‘s energy consumption.

Energy security is crucial for both sustaining high economic growth and controlling inflation. With rapid
economic growth, energy demand in India has been rising rapidly, and India is now the fourth largest consumer
of crude oil in the world. Unfortunately, India has to import most of its oil requirement, leading to severe
pressure on the economy when the oil prices rise

There are many different sources of energy consumption, such as coal, crude oil, natural gas, hydroelectric,
solar, wind, and nuclear energy. Out of India‘s total energy consumption, crude oil accounts for 24 per cent,
natural gas 6 per cent, coal 40 per cent, combustible renewable and waste 27 per cent, hydroelectric power 2
per cent, and nuclear energy and wind energy about 1 per cent each; solar energy has an insignificant share.
Thus, crude oil and coal account for about two-thirds of India‘s energy consumption.
http://ppac.org.in/WriteReadData/Reports/201411110329450069740AllIndiaStudyonSect
oralDemandofDiesel.pdf