Rising oil prices one of the biggest risks to Indian economy

Rising oil prices is one of the biggest risks to the Indian economy next fiscal year as it could crimp real incomes and spending, the Economic Survey has said.

India has benefited from the low oil prices for the last three years but about 45% rise in crude prices since the middle of 2017 appear to wipe out that advantage.

“It is estimated that a $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points, increases WPI inflation by about 1.7 percentage points and worsens the current account deficit by about $9-10 billion dollars,” the Survey said.

The average prices of Indian basket of crude oil have risen by around 14% per cent so far in 2017-18 compared to 2016-17, and could rise further by another 10-15% per cent in 2018-19, according to the Survey.

“(The higher prices) will crimp real incomes and spending—assuming the increase is passed on into higher prices, rather than absorbed by the budget through excise tax reductions or by the oil marketing companies,” the Survey said. “And if higher oil prices require tighter monetary policy to meet the inflation target, real interest rates could exert a drag on consumption.”

The Survey sees the risk of oil prices going higher if Saudi Arabia, in coordination with Russia, were ..

The recent rally in oil prices is a result of the extended agreement to cut output by leading oil producers such as Saudi Arabia and Russia.