Oil & Rains worry India

Economic situation could worsen if crude keeps rising

A rising crude oil price, a falling rupee and below normal monsoon have the potential to become a headache for the Modi government on the macro-economic front.

The price of Indian basket of crude oil has jumped from $45 a barrel in January to $63 a barrel in May, an increase of 40 per cent. This besides, a poor rainfall could impact the inflation which has been on lower side and may even hurt chances of rate cuts by the RBI. The twin factors could hurt the spending power of the rural India, hit corporate revenues and could even impact recovery.

A depreciating rupee could further aggravate the situation by making imports costlier.

“Both these things, a rise in crude oil prices and the below normal monsoon are not a good news for the economy. These factors will also increase inflation, which has been on the downwards trend,” said Sunil Kumar Sinha, principal economist and director (public finance), India Ratings.

Due to volatility in the crude oil prices, petrol price has been increased from Rs 56.49 per litre in February to currently Rs 63.16 a litre.

According to Mr Sinha, if crude oil remained at an elevated level it will impact fiscal deficit because of higher under-recovery on LPG and kerosene. However, he said that until and unless the crude oil touches over $80 a barrel it will not de-stabilised Indian economy like it did in mid-2013.

“It was a great news for India, when the crude prices came down significantly from $105 per barrel to $45 per barrel. But now it is the time for caution for all the stakeholders-— consumers, industry, government and the Reserve Bank of India,” said D.S. Rawat, secretary-general of Assocham.

“The worry is being aggravated by the pressure on the rupee, as crude oil price is on the rise in the global market. While it is too early to press the panic button, the government should have a contingency plan to deal with poor monsoon,” said the industry chamber.

The upward revision in petrol and diesel prices every fortnight by the oil companies —— if the rupee further weakens and bullish sentiment returns to the energy —— would not make good headlines for the economic sentiment, it said. However, the slowdown in the Chinese economy could keep oil price in control for somtime.