The Main Content –
It is fair to state that oil is still the primary energy source. Oil has been refined since the 1950s to produce usable products, including gas, diesel, and other petrochemicals. We would be affected infinitely by an increase in the crude oil price.
Transportation is a significant sector for oil (naturally occurring fossil fuel made up of hydrocarbons and organic compounds). The industrial world and modern society rely on oil for their needs.
Oil provides energy to the power sector, aircraft and vehicle industries, chemical and pharmaceutical industries, companies, and houses worldwide, making it crucial to our daily lives and necessities.
India’s dependency on oil
India utilizes less than one percent of Russia’s Urals-grade crude oil. The Middle East, Saudi Arabia, Iraq, and the United States are India’s leading crude oil suppliers.
There hasn’t been any revision to gasoline prices for a long time. International oil prices are strongly correlated with gasoline prices in India. The retail price of gasoline comprises three components:
- Base price (the price of crude oil on the international market)
- Central Excise Duty
- State Duty on Excise
Due to continued geopolitical concerns, the Indian Finance Minister, Smt. Nirmala Sitharaman released the Union Budget 2022-23, assuming crude oil prices will fluctuate between $70 and $75 per barrel.
No one anticipated the present trend of soaring oil prices, which have reached $100 per barrel and show no indication of halting or slowing down soon.
Due to the isolation of Russian banks from the dollar and euro payment systems, India and Russia recently unveiled a plan for New Delhi to pay for decreased oil imports through rupee-to-ruble conversions.
Since the invasion began on February 24th, India has purchased at least 13 million barrels of Russian oil and contracted crude oil supplies for the next three to four months. India’s import bill won’t be affected if Russia purchases crude oil.
For the time being, the current government strategy of tax cuts and other measures can withstand rising global oil prices.
However, if the current price pattern continues, inflation will be unavoidable. Trade the markets with the top 10 stock brokers in India as inflation rises.
Should the trend continue?
According to Credit Suisse’s estimate, Brent crude oil prices at $120/barrel would add $60 billion to India’s import bills.
Every $10 increase in crude oil prices potentially leads to an increase in the CAD by 0.4-0.6% of the GDP. It would impact India’s retain inflation by 30-35 basis points and wholesale inflation by 130 basis points.
Impact on India
Morgan Stanley noted that the recent 25% jump in oil prices would expand India’s CAD by around 75 basis points and inflation by 100 basis points on an annualized basis.
The expanding current account deficit means India will import more goods and services than exports, effectively devaluing the Indian rupee.
The economic uncertainties will further impact development activities in India, creating an impediment to the GDP growth rate of Asia’s third-largest economy. It will further impact corporate earnings and household spending.
Keeping fiscal and other deficit promises will decrease social assistance and infrastructure expenditures, including roads and water.
Moreover, analysts predict the government may have to cut the road and infrastructure cess (RIC) to counter the increased impact of rising oil prices.
Construction equities are under pressure year-to-date due to increased petroleum costs. If you want to trade or experiment with these stocks, you should get advice from the best stock market app in India.
As transportation prices go up, one can observe that the price of edible oil, essential food items, meat, eggs, milk, and vegetables has also been rising sharply.
Current Situations
The world has witnessed a 57.51% rise over the last 12 months. Union Minister, Shri Hardeep Puri, credited the BJP Govt, despite the sharp increase in oil prices worldwide, has maintained a low increase of only 5% at our bunks.
He stated fuel prices had gone up by over 50% in countries like the US, the UK, Canada, Germany, and Sri Lanka.
Our petrol price increases have been minimal compared with the rise of petrol and diesel rates in other countries after the Ukraine invasion.
He has also addressed the problem of high petroleum prices with the Organization of Petroleum Exporting Countries (OPEC), requesting that they raise crude oil output.
Risk Measures and Management
There are two likely possibilities to manage India’s high crude oil prices. They are:
- In addition to the increase in crude oil prices, consumers see an increase in retail prices of petroleum products. We are already noticing this with daily fluctuations in petrol prices over the last few weeks.
- The government absorbs the real oil price shock rather than deflecting it off its consumers. It would lead to an increase in its current account deficit (CAD).
The Final Word
It does not stop here. Apart from the cushioning effect from the Central Government, the burden will have to be further diversified across – the Finance Ministry, the Reserve Bank of India, and private sector companies. All 350 million households in India can help reduce the impact if they chip in.
