High Oil Prices Constitute Major Risk To India’s Burgeoning Economy
Oil market commentators have often noted that India is among the bright spots for crude oil demand in 2018. Market data also offers ample proof that the Indians, who are posting double digit economic growth by some measures, are currently the most coveted clients for crude exporters among the big five global importers – i.e. U.S., China, India, Japan and South Korea.
With its booming manufacturing industries, supplemented by services and technology industries, the Indian economy swelled on the back of cheap oil prices with Brent posting sub-$30 per barrel levels at one point during the recent oil price slump of 2015-16.
But that was then for a country reliant on imports for 82% of its crude oil needs. The here and now is worryingly different if the latest conjecture and data from the Petroleum Planning and Analysis Cell (PPAC), the statistical arm of India’s oil ministry, is anything to go by.
In 2017, just when oil prices resumed some semblance of a recovery, India imported 213.93 million tonnes (MT) of crude oil at a cost of $70.2 billion. Subsequently, as oil prices have continued to rise, so have Indian importation volumes, with Delhi taking in an average 18.5 MT of crude oil per month.
In sheer barrels per day (bpd) terms, taking one tonne to equate 7.33 barrels, India is just shy of importing 5 million bpd, having overtaken Japan to become the world’s third-largest oil importer behind China and the U.S.
Were the monthly average importation volumes to stack up for 12 months of the fiscal year, India would be looking at a $109 billion bill in the current fiscal; an increase of 24% going by conservative estimates, with Brent the global proxy benchmark lurking near $75 per barrel just shy of three-year highs.
Projections aside, recorded data also offers evidence of rising costs with the country’s overall crude oil import bill in the three months to June rising by 51% on an annualized basis to $28.3 billion from $18.8 billion recorded in the corresponding quarter last year.
This has resulted in the worsening of India’s Current Account Deficit (CAD) and fiscal deficit, says Fitch-owned research outfit India Ratings. It reckons the increase in global crude oil prices led to CAD widening by $16.60 billion to a five-year high in June, wholesale inflation shooting up 5.77%, a four-and-a-half year high, and retail inflation growing to a five-month high of 5%.
Overall, India’s CAD is likely to range between $22 billion to $31 billion in the country’s current financial year ending March 2019.
“Brent crude averaging $70 per barrel in FY19 will translate into Indian crude oil basket averaging $68 per barrel. If the rupee (INR) averages $66.6 in FY19, net addition to CAD would be $22.23 billion. However, if the Indian crude basket averages $72.86 per barrel, and INR averages $68.00, the net addition to CAD would be $31.20 billion,” India Ratings adds.
The research firm opined that the Indian economy has the resilience to withstand and absorb the oil price shocks for few months, but if oil prices remain high beyond 2 to 3 months, it will “adversely impact all the major macroeconomic variables such as current account, currency, inflation, interest rate, fiscal deficit, GDP growth and conduct of monetary policy.”
Furthermore, in light of rising crude prices, India’s petroleum subsidies are another matter of concern. According to Moody’s, the surge in prices could result in India’s petroleum subsidies snowballing to INR 530 billion ($7.7 billion). But the Indian government budget only makes a cost allocation of INR 245 billion ($3.6 billion) in the current fiscal year.
In a bid suss out what the market makes of the impact of oil prices on India’s economic prospects versus other macroeconomic risks, Moody’s polled 175 investors, representing more than 100 local and international financial institutions, at its recent 4th Annual India Credit Conference in Mumbai and Singapore.
Their response chimed with wider market worries, says Joy Rankothge, Vice President and Senior Analyst, at Moody’s.
“When asked about the top risks facing the Indian economy, most of the respondents highlighted high oil prices as the top risk, while 30.3% of those in Singapore picked rising interest rates as the next top risk, and 23.1% of those in Mumbai picked domestic political risks as the second top risk.”
In both locations, most attendees said they believed that India would not meet the central government’s fiscal deficit target of 3.3% of GDP for the fiscal year ending March 2019. Only 23.3% of the respondents in Singapore and 13.6% in Mumbai thought that the fiscal targets would be achieved, with 84.7% in Mumbai and 76.7% in Singapore expecting some fiscal slippage.
It remains to be seen where it all goes for the Indian Government. One saving grace is that even though no one is predicting a slump to sub $30 oil prices, current crude benchmark level are oscillating in a very predictable $60-80 range. As such, that could provide some level of predictability, albeit at relatively higher prices than India would be comfortable with.