Indicating adverse macroeconomic impact of rise in crude oil prices, global financial services major Nomura said every $10 per barrel rise in the price will worsen India’s fiscal balance by 0.1% and current account balance by 0.4% of GDP.
“For a net oil importer like India, a sustained rise in crude oil price would have adverse macroeconomic implications,” Nomura said in a report. “Higher oil prices are tantamount to a negative terms- of-trade shock that weakens growth, pushes up inflation and deteriorates the twin deficits (current account deficit and fiscal deficit),” it added.
The financial services firm noted that while brent oil price should on an average stand at $53-54/bbl in the current as well as next fiscal year, current prices have already risen by more than 10%, driven by a mix of demand and supply side factors. On the current account balance front, Nomura has estimated the net impact of rise in crude oil prices would be negative, with “every $10/bbl rise in crude oil price worsening India’s annual current account balance by 0.4% of GDP”.
At the same time, it also estimates that every $10/bbl rise in crude oil price would hit the central government’s fiscal balance by 0.1% of GDP. “Petrol and diesel prices are now determined by the market, but the government still provides a subsidy that is limited to Rs12/litre for kerosene and Rs15/kg for LPG. While noting that its calculations do not take into account any impact on tax collections, “any government efforts to cushion the burden on consumers by lowering the excise duty on petrol and diesel would adversely affect tax revenue collections”.
“Every Rs1 per litre reduction in the excise duty on these two fuels (petrol and diesel) lowers government excise collections by Rs130 billion (0.08% of GDP) annually,” Nomura said. Besides, the Japanese financial services firm has also calculated that every $10/bbl rise in crude oil price would increases CPI inflation by 0.6-0.7% points.
“We see that the direct impact of higher oil prices will be visible in the about 3.6% of the CPI basket that comprises diesel and petrol and unregulated liquefied petroleum gas (LPG) segment,” the report said. “Higher oil prices also have an indirect impact via higher production and transportation costs and could exert upward pressure on food inflation, at the margin.” it added.
Observing RBI estimates that for every $10/bbl rise in oil price, GDP growth is reduced by around 0.15% points, Nomura said economy is effected as rise in inflation due to higher prices could lower real disposable incomes of households and therefore hurt consumer discretionary demand. Further it lowers corporate profit margins due to rising input costs and accordingly impacts investment, among others.