By Akhil Gore

Higher prices: adverse impact on fiscal deficit

India imports 1.5 billion barrels of crude oil each year . This comes up to around 86% of its annual crude oil requirement. So, the surge in crude oil prices could increase India’s expenditure, thus adversely affecting India’s fiscal deficit - the difference between the government’s total revenue and total expenditure. Fiscal deficit indicates the amount of money the government has to borrow to meet its expenses. A rise in fiscal deficit could negatively affect the economy as well as markets. The fall in crude oil prices was a major contributing factor in the reduction of India’s fiscal deficit between 2014 and 2016, according to a report by Livemint 

Impact on the rupee

The rise in crude oil prices has a clear impact on the Indian rupee. On 24 May 2018, the rupee closed at 68.34 against the US dollar. This is a near 18-month low for the rupee, and only 0.6% away from its all-time low of 68.825, according to a Livemint report . In addition, if crude oil prices remain at these high levels, the rupee is further expected to depreciate by the year end. Rupee depreciation has a reverberating effect on the Indian economy and even the stock market.

Impact on Current Account Deficit (CAD)

India’s dependency on crude oil imports has only been increasing over the past few years. The dependency rose from 77.3% in FY2014 to 83.7% in FY2018. The rise in crude oil price has a big impact on the Indian Current Account Deficit (CAD). CAD is a measure of India’s trade where the value of goods and services imported exceeds the value of goods and services exported. CAD essentially indicates how much India owes the world in foreign currency. An SBI report suggests that Indian’s CAD could cross 2.5% of GDP for FY2019 (providing oil price continues at $80 per barrel).

Impact on inflation

Oil is a very important commodity and it is required to meet domestic fuel needs. And in addition to that, it is a necessary raw material used in a number of industries. An increase in the price of crude oil means that would increase the cost of producing goods. This price rise would finally be passed on to consumers resulting in inflation. Experts believe that an increase of $10/barrel in crude oil prices could raise inflation by 10 basis points (0.1%).