The Hindu Business Line : Oil at $50 will push inflation up 1.5 pc, says FICCI study

THE cumulative impact of a double-digit oil price hike in 2005-06 coupled with a 14.9 per cent rise in 2004-05 will be most felt by the manufacturing sector - especially chemicals, transport equipment, textile products, basic metal and non-metallic minerals - according to a Federation and Indian Chambers of Commerce and Industry (FICCI) study.

Macro impact of high oil prices of $50 per barrel will be 0.4 per cent on GDP growth and push up inflation rates by 1.5 per cent, the study said.

FICCI estimates also show that if oil prices go up to average price of $80 per barrel for a full year, it will pull down GDP by 4.9 per cent and raise the wholesale prices index by 7.9 per cent over the current levels.

The study revealed that that among the different sectors of the Indian economy only the manufacturing sector had a negative relationship with oil prices. Despite being most susceptible to oil prices increases, a lagged impact spread over three years, usually allows the manufacturing sector to escape the full brunt of most sharp oil price hikes, it pointed out.

The overall impact, however, could be a slightly higher as the study estimates the direct impact of high oil prices on output and does not capture the indirect impact especially on consumption spending and overall demand conditions in the economy. The study also assumes that the oil companies will hike the domestic prices in tune with the increase in international oil prices.

The overall impact of the high oil prices on the Indian economy in the current scenario is also restrained by other factors such as comfortable balance of payment position, large foreign exchange reserves and access to international capital.

These parameters have improved substantially in India's favour as compared to the previous periods of high oil prices.

The FICCI estimate of the impact of high oil prices is also based on a reworking of the oil intensity levels in India and other major economies.

Oil intensity is the ratio between oil consumption and economic output - the amount of oil used to generate each dollar's worth of GDP.

The study, however, estimates oil intensity by measuring oil consumption in each country against the GDP estimated on a purchasing power parity basis.

According to the revised FICCI estimates of oil intensity based on GDP calculated on a purchasing power parity basis, India and China had the lowest oil intensity across most major developing and developed countries. The oil intensity of the Indian economy has slowed down from 0.05 in 1999 to 0.04 in 2004. This is the same trend as in China, which was identified as another major country with the lowest oil intensity.

In contrast, the oil intensity in the US was 0.10 while that of Canada was 0.11 in 2003. The developed countries, which have lower oil intensity closer to that of India and China were Japan, France and Germany where the oil intensity levels were at 0.06 and also United Kingdom where the oil intensity was calculated at 0.05.

The oil intensity of other major developing countries in 2003 was as follows: Brazil (0.07), Indonesia (0.08), Nigeria (0.08) Thailand (0.09), Egypt (0.10) and South Korea (0.11).

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