How crude oil at $100 will affect India

By Abhishek Sankhyayan

New Delhi: Crude oil touched $100 for the first time in seven years soon after Russia invaded Ukraine. The escalating conflict is expected to have serious repercussions across the globe, with the West imposing sanctions on one of the world’s biggest suppliers of oil and natural gas.

In such a situation, India too might not be able to bypass the effects of a global crisis. Let’s have a look at how the conflict might affect you.

1.Tax collection of Government

On January 4, crude was trading around$ 80, at that time the price of petrol in Delhi was Rs 95.41 per litre. Crude oil has risen to about 25 percent. The cost price of crude oil has directly increased by Rs 10 per litre.  In such a situation, Petro retailers will gradually revise the price of petrol and diesel gradually after assembly results on March 10. 

On November 3 last year, the Modi government had reduced the excise duty on petrol and diesel by Rs 5 and Rs 10 respectively. Following the move, many state governments have also reduced VAT. 

As we know that tax on petroleum products is a big source of revenue for the state and central governments. Petro products are taxed at a higher rate in India compared to our neighbours.

Central Govt will be compelled to pass the price rise to consumers if prices don’t subside in coming weeks. In such situations the Central Government and the State Governments will have to review the rate of its taxes i.e Excise Duty and VAT , which will  adversely impact the revenue of the governments. Any projected revenue loss will force governments to cut the expenditure in their development works.

Finance Minister Nirmala Sitharaman has told Rajya Sabha that the central government has earned Rs 2,10,282 crore in the financial year 2019, Rs 2,19,750 crore in 2020 and Rs 3,71,908 crore in 2021 through Central Excise Duty on petrol and diesel.

2. Rise in Inflation

According to research by Ernst & Young India, 50 percent of the total petroleum market of the country is divided into diesel, 20 percent petrol and kerosene and 25 -30 percent in ATF. In such a situation, the effect of expensive diesel will be seen on freight charges immediately.

The increase in the prices of petroleum products indirectly affects the prices of services as well.  On February 10, the RBI said that it expects inflation to touch tolerance band in the January-March 2022 quarter and will be under control from the next quarter. Notably, RBI has projected the CPI (Consumer Price Index) rate to be 5.3 for the current financial year and 4.5 for the next financial year 2023.

3. Higher interest rates, Expensive loans

The Reserve Bank (RBI) has not revised interest rates for the last two years. At present, the repo rate remains at 4%. RBI and the government believe that low-interest rates will create liquidity in the market, which will help growth. But after covid, central banks around the world have warned about change in the status quo. 

According to the RBI estimate, there is an increase of 0.24 percent on the CPI when the price of oil increases by $ 10 per barrel. If the consumer inflation rate (CPI) rises due to higher crude prices, then RBI will be under pressure to raise the interest rates. In such a situation, your home loan, car loan and the personal loan will become expensive.

4. Adverse impact of GDP Growth

According to Nomura's research, a 10 % increase in crude prices leads to 0.2 basis point reduction in GDP growth. Economic Survey 2022-23 has estimated the GDP growth of  8-8.5%. However, the projected GDP growth for the forthcoming fiscal is based on oil price projection of $70-75 per barrel range.

Budget documents hope that at the end of this financial year, India will register real GDP growth after two years. Due to the Covid crisis, the country's Gross Domestic Product (GDP) has not increased for two years. In such a situation, a decrease in the GDP growth rate will have an adverse effect on the government's ability to collect taxes and create jobs.

5. Current Account Deficit

Current Account Deficit is a situation when the gap between the import price of goods and services exceeds the export price. India's current account deficit reached $9.6 billion in the second quarter (Q2FY 22), which is 1.3 percent of GDP. According to ICRA, it may cross $25 billion in the third quarter.

According to the RBI, an increase in the price of crude oil by $ 10 per barrel increases the current account deficit by 0.5 percent.

If crude oil remains consistently above $100, then CAD (Current Account Deficit) can reach three percent of GDP. Due to which there will be pressure on the rupee and the value of rupee can fall to 78, Says Tanvi Gupta, Chief Economist of UBS Security.