Rising crude oil prices is a key challenge to new government

Two things that fox politicians and political economists are voter mindset and crude oil prices. Both cannot be predicted. Soon, India will have a new government and the challenge before it will be to find ways to offset the inflationary impact of higher fuel prices and relieve the burden on the poorer sections of the population.

Brent oil closed at a fresh five-month peak of $71.97/barrel on Thursday, ahead of the Good Friday holiday, according to a report by Vanda Insights.

Vandana Hari, Founder and CEO of Vanda Insights, told BusinessLine: “I think crude’s upside from current levels is limited, so the government will likely not have to face the strain of prices above $80/barrel.”

High oil prices are a concern for consuming nations such as India. The oil price crash of 2014, and sustained low prices for two years after that, was a fortunate tailwind for the Narendra Modi-led government when it came to power.

“The government made good use of it by doing away with diesel subsidies and phasing out a good part of the LPG subsidies. However, a deregulated fuel pricing system does present challenges, as world oil prices rise. A full pass-through of higher crude costs can create inflationary pressure on the economy, and in cases of extreme spikes, even stunt economic growth,” Hari pointed out.

India’s growth target

The current spike in oil prices has revived concerns of 2018, said NR Bhanumurthy, Professor, National Institute of Public Finance and Policy, adding that many international agencies have downgraded India’s growth target.

“The new government will have to tackle this oil price while ensuring that pressure on inflation is low. In fact, the Monetary Policy Committee of RBI has also cautioned about it,” he said.

Bhanumurthy feels that low oil prices between 2014 and in the first half of 2018 helped contain fiscal deficit and inflation. “But, the growth would have been at a higher pace, had it not been for demonetisation and GST. This had also led to questions being raised on the strength of the Indian economy,” he said.

Sunjoy Joshi, Chairman, Observer Research Foundation, has a word of caution for the new government that comes in. “What the fiscal deficit numbers hide are the inordinate gains from high oil taxes and dividend stripping and share transfer/buyback bonanza extracted from the oil companies meaning to impoverished PSUs but a richer government,” he says. 　

“Fundamentally, low oil prices were not passed on to the larger economy or they would have boosted GDP growth,” he added. The collapse of Jet Airways and Air India is also a consequence of high aviation fuel taxes, said Joshi, adding that Pakistan closing airspace is adding to costs of domestic airlines.

High demand for oil and rising dependency on crude imports also means a drain on the country’s foreign reserves, which will get exacerbated by a weaker rupee against the dollar, said Hari, adding: “But, crude is still a buyer’s market and major Asian economies such as China and India have a strong bargaining power with their term suppliers in West Asia, especially as competitive US supplies are starting to flood into these markets. It is up to the PSUs to secure good deals in their term crude import contracts.”

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