When Narendra Modi assumed office in May 2014, crude oil was trading above $100 per barrel. By 2015, Brent crude prices fell by more than half, and they stayed below $70 per barrel until 2018.

Cheap oil brings two benefits for the Indian economy. One, it helps keep inflation under control. It also helps in keeping the current account deficit under control. In the present government’s case, it also brought an extra benefit. The government increased taxes on petroleum products and had a windfall gain in revenue collection. Additional taxes from petroleum products played an important role in bringing down the fiscal deficit in the initial years of the Modi government. Crucial as these benefits were, they were largely exogenous. International oil prices are determined by factors such as global growth rates and geopolitics regarding oil producing countries, which are located outside the Indian economy.

Recent developments and oil price movements suggest that India’s next government, which will assume office in a month, will most likely not inherit the benign oil price environment which its predecessor enjoyed. The United States has decided to withdraw its exemption (from sanctions) to countries which were importing oil from Iran, the seventh largest oil producer in the world. While the Indian government has asked the US to not push for this till the election process is on, New Delhi will have to take a call on the issue sooner or later. The Iran question notwithstanding, the oil price cycle has been on an upward trajectory for quite some time now.

If economic growth does not pick up — GDP growth has been going down for four consecutive quarters ending December 2018 — non-petroleum revenues are bound to come under strain. Any significant spike in oil prices, which cannot be ruled out in the medium term, will only increase the pressure on the fiscal front.

The next government’s reactions to these eventualities will also depend on its parliamentary strength. An overwhelming majority for a single party might lead to a prioritising of keeping the fiscal deficit under check even at the cost of passing on higher prices to consumers. In case the elections end up being closer and lead to the formation of a coalition government without one party having the majority, populist pressures might lead to the holding back of such measures. India’s macroeconomic outlook, therefore, will remain uncertain for the next few months.

First Published: May 01, 2019 03:14 IST