Rise in crude price: Future tense

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After economic slowdown India is greeted with oil shock. The attack on Saudi Arabia’s Abqaiq plant, which accounts for 5 percent of global oil supplies, and a nearby facility took 5.7 million barrels a day of production off line for at least a few days. The Kingdom is one of the main suppliers of crude oil for Indian refiners and any such geopolitical development has immediate impact on prices. Higher crude oil prices will adversely impact the twin deficits of current account and fiscal, which will have spillover effects on monetary policy, consumption and investment. India’s petrol and diesel prices have reached to its highest level since this year’s first budget after the attack. Even more worrying is the likely negative impact higher oil prices will have on India’s current account deficit, fiscal deficit and inflation in the wider economy. The economy is already reeling under a recessionary pressure. Its early recovery looks almost impossible under these circumstances. The fiscal deficit is also likely to get increasingly out of control. On the top of it India’s dependence on imported oil is steadily growing as the domestic oil output remains downward since 2015-16. India’s crude oil production in 2018-19 dropped to 34 million tonnes from 36.9 million tonnes in 2015-16. The challenge before Modi government will be to find ways to offset the inflationary impact of higher fuel prices and relieve the burden on the poorer sections of the population.

One tricky question is “what is driving higher crude prices?” The question is relevant because the factors leading to change in prices will decide the sustainability of the higher prices. There is no denying that there has been established links between oil price and economic growth and crude oil plays a crucial role in a country’s economic growth. High demand for oil and rising dependency on crude imports also means a drain on the country’s foreign reserves, which will get exacerbated by a weaker rupee against the dollar. So, an extended oil crisis could make India’s economic recovery and higher GDP growth difficult.

In short, one could safely conclude that higher crude prices will adversely affect the twin deficits-fiscal and current account deficit-of the economy, which will have spillover impact on the monetary policy, and consumption and investment behaviour in the economy. Can India cut down oil consumption? Yes, it can. This is by vastly increasing the use of electric transport system, including a large systematic expansion of the metro railway networks. The reach of these metro services needs to be vastly expanded and more cities should to be brought under the metro system. A shift in investment toward the development of renewable energies is another option. India is said to be already a significant developer of new technologies, with high hopes of manufacturing a large fleet of electric cars in the coming years. The government is pushing hard on electric vehicles partly to try to reduce the dangerous levels of pollution present in its major metropolitan cities as well as to reduce India’s reliance on oil. It is good option.

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