As crude prices dipping to the new lows, it is certain that the price fall will bring gains to importing countries like India. So far, crude continues to fall and reached below $65 mark for the Brent quality on Wednesday.
Though price may reach at new lows, expectation is that it may settle at $75-80. In this context, there is scope for considerable economic gains for oil importing countries.
For India, crude oil import bill was $165 billion during 2013-14 according to the RBI’s provisional estimate. It accounted for 36% of the total import of $450 bn. According to the World Bank, average crude price during 2013 calendar year was $104.
If the price settles at $75 dollar during 2014-15, a gain of $29 will bring considerable economic benefits to India.
According to Bloomberg, if Brent remains around $70 a barrel, India will gain $52.7 billion in the coming year.
Gains from crude price fall are there on different fronts. First is the reduction of import bill and comfortable current account position as crude is the largest import item for the country.
Secondly, it will soften inflation in the economy. Already, CPI is at a comfortable level of 5.5%. According to the Japanese Investment banker Nomura, a $10 fall in crude will reduce inflation by 0.2 percent. Actually, this gain in price level depends upon whether the government is ready to pass on lower crude prices to the consumers by not raising taxes. Similarly, companies are not cutting prices in accordance with the fall in international crude prices.
Another direct benefit from crude fall is that it will be a stimulus on the economy. Reduced costs, prices and increased income will promote more economic activities and growth.
On the fiscal front, the impact of crude fall will not be that much sizable as in the past. This is because already the government has introduced deregulation of the two most popular crude products- petrol and diesel. At the same time, government can get relief as subsidy burden on kerosene and cooking gas comes down.
Amidst these gains, there are risks out of the crude fall. The most important one is that many of India’s export markets including Saudi Arabia and UAE may turn to austerity and this will reduce export to these countries.
