The repercussions of surging international crude oil prices are set to cast a looming shadow over India, a nation heavily reliant on crude oil imports to cater to its escalating domestic energy needs, spanning retail, transportation, agriculture, industrial sectors, and more. While India’s economy is showing signs of resilience with robust growth, driven by strengthening domestic consumption and investment, there are underlying risks stemming from persistently high inflation, unpredictable climate shifts, and geopolitical tensions.
Global Economic Challenges:
The global economy remains on shaky ground, still grappling with the aftershocks of the COVID-19 pandemic and the ongoing Russia-Ukraine conflict in Eastern Europe. The recently published World Economic Outlook (WEO) for October 2023 by the International Monetary Fund (IMF) paints a sobering picture, with global economic recovery projected to decelerate from 3.5% in 2022 to 3.0% in 2023, further dipping to 2.9% in 2024. Amid this global malaise, India stands out as an economic bright spot, driven by factors such as increased domestic consumption, revived consumer and business confidence, growing industrial activity, and a focus on capital expenditure.
However, the Indian economy faces significant challenges, including elevated inflation, unpredictable weather patterns, and geopolitical tensions in various parts of the world. The latest resolution from the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) in October 2023 reflects these challenges, with economic growth projected to trend downwards from 6.5% in Q2 to 5.7% in Q4 for the year 2023-24.
Geopolitical Crisis and Crude Oil Prices:
The emergence of a geopolitical crisis in the Middle East, triggered by the Israel-Palestine conflict, could exacerbate the already fragile global economic prospects. The escalation and widening of the conflict, involving neighboring regional powers like Saudi Arabia, Iraq, and Iran, has the potential to exert inflationary pressures worldwide by driving up crude oil and energy prices. These countries are major players in the global oil production and export market, with the Persian Gulf countries contributing around 32% of the world’s total oil production in 2022. Saudi Arabia, Iraq, and Iran accounted for 13%, 5%, and 4%, respectively, of the world’s oil production in the same year.
India’s Vulnerability to Rising Oil Prices:
For India, the adverse consequences of surging international crude oil prices are twofold. First, it results in imported inflation due to the country’s heavy reliance on crude oil imports to meet its growing energy demands. As per the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas’s August 2023 report, India’s import dependency on crude oil rose to 87.8% in April-August 2023, up from 86.5% in the same period the previous year. India is also the third-largest crude oil importer globally, primarily sourcing crude oil from Persian Gulf countries.
Impact on India’s Economy:
Rising oil prices are a boon for oil-producing nations but a bane for import-dependent countries like India. The Indian economy will inevitably experience increased import bills, leading to a trade deficit expansion, particularly when the global trade and export outlook remains subdued. The persistent trade deficit growth may further translate into a higher current account deficit (CAD). A higher CAD, combined with capital outflows, will result in an overall balance of payments deficit, leading to a reduction in India’s foreign exchange reserves.
Furthermore, the rise in oil prices may necessitate fiscal subsidies from the Indian government to compensate for the mounting losses of oil marketing companies (OMCs), which have maintained stable domestic fuel prices in light of upcoming elections. Additionally, the potential reduction in excise duties on petrol and diesel to mitigate price increases resulting from higher energy costs will affect the government’s revenue generation, potentially impacting fiscal targets.
Mitigating the Risk:
To mitigate the risks posed by oil price volatility in the international market, India should diversify its sources of oil and energy products beyond traditional Gulf partners and explore cost-effective import opportunities elsewhere. Promoting the adoption of renewable and alternative fuels, granting greater autonomy to domestic oil companies, encouraging private sector participation in oil and natural gas production, and investing in research and development to explore indigenous energy resources are measures that can reduce India’s heavy dependence on oil imports.
In the face of continually deteriorating geopolitical conditions and challenging economic circumstances, Indian policymakers must remain vigilant and agile, crafting a well-calibrated and innovative mix of policy actions to steer the Indian economy effectively and avert potential serious repercussions.