With crude oil price hitting a 7-year high, there will be a severe impact on the Indian economy, especially in terms of inflation and value of rupee, finds a recent report by Bank of Baroda.
With a global trading price of $88 per barrel, oil prices have hit an all-time high in the last seven years. The high price, which has gone up by nearly 28 per cent between December 2021 and January 2022, might severely impact the Indian economy and create pressure on the value of the Indian rupee (INR) in the global market, finds a recent report by the Bank of Baroda, published on January 19.
The report mentions that there was a growing demand for oil worldwide even in pre-pandemic times, but the supply was not up to the mark. The report quoted the International Energy Agency (IEA) saying that there is still a shortage of nearly 1 million barrels per day worldwide. This imbalance between demand and supply of oil coupled with various other geopolitical tensions resulted in the spike in price finds the report.
Here are some of the major effects of rising oil prices on the Indian economy:
1. Higher Inflation
The report suggests that a 10 per cent increase in crude oil will lead to an increase in the Wholesale Price Index (WPI) in India by nearly 0.9 per cent. The report predicts that increasing oil price may even result in a rate of inflation based on WPI at 12 per cent and 6 per cent for FY22 and FY23, respectively.
There will also be a significant impact on the consumer price index (CPI) and the rate of inflation in terms of CPI may be at 5 per cent in FY23 due to the rise in oil price. Thus, if the price of oil goes up by 10 per cent, the price of the goods in India will be up by 5 per cent.
2. Fall In Value Of Rupee
Since the outbreak of Covid-19, there has been a fall in India’s total oil import. Oil import accounted for nearly 27 per cent of India’s total imports in FY19 and fell to 21 per cent in FY21. Although there has been a slight rise in FY22, it is yet to get back to the pre-pandemic level. “We estimate that a 10 per cent hike in oil prices lead to an increase of India’s current account deficit (CAD) by nearly $15 billion or 0.4 per cent of GDP. This will have a negative impact on INR,” says the report.
Moreover, as the study suggests, with an average increase of 1.2 per cent in oil prices, there will be a fall of around 0.9 per cent in the value of the rupee.
3. Better Subsidy
Rising crude oil prices will also have a positive impact on the Indian economy. Revenue collection from the petroleum sector has been high for both the centre and the states. The centre got Rs 2.87 trillion and Rs 4.2 trillion, respectively, in FY20 and FY21. “Higher crude price will mean higher revenue for the states under unchanged excise duty conditions. Thus, with crude prices going up, the subsidy on LPG and kerosene will be high subsequently, though this may not be very significant,” adds Madan Sabnavis, chief economist of the research team.