Low oil prices more than offset the negative impact of ballooning imports on India’s macro-economic indicators – trade and current account deficits as well as inflation – and helped the government manage its finances better by reducing fuel subsidies, according to an Exim Bank report.
In its latest perspective report, ‘Oil Price and International Trade in Petroleum Crude & Products: An Indian Perspective’, the bank said even though the country’s total import of crude and petroleum product rose to about 268 million tonne (MT) in 2016-17 from 219 MT in 2013-14, the outgo fell from $165 billion to $87 billion due o the sharp decline in crude prices during this period.
Similarly, low oil prices reduced fuel subsidy to Rs. 29,999 crore in 2015-16 from Rs 85,378 crore in 2013-14. Had oil prices remained at the 2013-14 levels, fuel subsidy would have been around Rs 61,174 crore, the report said.
Thus, the net impact of the slide in oil prices – which began in June 2014 and lasted through much of 2016 – have been positive on government finances. The report pointed out that CAD came down to around $22 billion, or 1.1% of GDP, in 2015-16 from $27 billion (1.3% of GDP) in 2014-15 on the back of contraction in trade deficit. The report said trade deficit would have gone up by $82 billion in 2016-17 had oil prices remained at the 2013-14 levels.
To put things in perspective, lower CAD makes the rupee strong and reduces the cost of other imports. A stronger rupee also helps keep inflation in check, which in turn creates ground for lower interest rates. Lower fuel subsidies reduce fiscal deficit and allows the government more flexibility in social sector spending.
But the good times may be headed towards an end, the report warned, saying global benchmark Brent crude will average $86 per barrel (in terms of the dollar’s value in 2016, which removes the effect of inflation) by 2025, $95 by 2030 and $109 by 2040.
