Falling Crude Oil Price: What Does That Mean For India?

A fall in the crude oil price has come as a blessing for the Modi-led NDA government. In its maiden budget, the government had estimated India's fuel subsidy amounting to be at Rs 94000 crore considering the brent crude prices would be hovering around USD 105-110 a barrel. However, the crude brent has declined to USD 92 a barrel which is lowest in 27 months and it will help the government to achieve its fiscal deficit target of 4.1%. 

The decline in the crude oil prices can be attributed to the higher supply in USA. This along with the price cut by the Saudi Arabia's state-owned oil firm Saudi Amarco led to fall in the crude oil prices. The company on Thursday (2nd October 14) announced that it was cutting prices by about USD 1 a barrel.  This has resulted in the OPEC countries to gear up for a price war. Besides, further price decline was witnessed after USA Energy Information Administration cut its global oil demand as US economy is about to become self-sufficient in oil soon. 

About 85% of India's crude oil requirements are met through imports. Therefore, with every dollar reduction in the crude prices, India's subsidy burden is likely to ease.

On the macro front, the falling crude oil prices results in several benefits for the Indian economy. Firstly, it will help the government to tame down the inflation as fuel prices have direct effect on inflation, more on inflation measured by WPI. So if the crude continues to fall, the diesel prices may fall if government decides to cut down the prices. Any such cut will help to bring down the inflation by around 75 basis points. 

Secondly, fall in prices will lower the subsidy burden for the government. The de-regulation of the subsidy will also benefit oil-marketing companies like Indian Oil, HPCL and BPCL. In the last fiscal of FY14, these three firms under recovery for diesel stood at Rs 62837 crore. However, during FY15, there was an over recovery of 35 paise from September 16 on diesel and further it is projected to rise by Rs 2.50 for every liter.

Thirdly, it will reduce the Current Account Deficit (CAD) due to the lower import bills which will give government a good cushion to maintain its fiscal deficit and support growth in GDP. During FY14, India's net oil import accounted for 21% of India's total import bill and 64% of trade deficit.

According to some of the news reports, we have entered an era of oil abundance where the supply is more than demand. However, the future is unpredictable and one can never be sure of how the crude oil prices will behave in future. Due to the political instability in Middle East, prices are likely to be affected. It may be prudent to take the maximum advantage from the current lower prices. Therefore it is a good time for the government to push in some necessary reforms for the energy sector and expedite the de-regulation of diesel prices.