India's economic challenges amid soaring crude oil price

The fallout of the Russia-Ukraine conflict might prove to be severe for India. The rupee is close to 77 a dollar. Despite the Reserve Bank’s attempts to manage this fall, the rupee has been Asia’s worst-performing currency in 2022. According to one financial daily, several brokerages, banks and treasury departments are fearing the rupee might plunge below 80 a dollar. Meanwhile, the crude oil price has touched 130 dollars a barrel. Now it is feared to go past 150 dollars within a few weeks, or even 200, depending on how the conflict in Europe progresses. According to a report by Kotak Institutional Equities, a likely drop in crude oil exports from Russia could keep oil prices elevated for a protracted period. At an average crude oil price of 120 dollars a barrel, the report estimates an additional burden of 70 billion dollars on the Indian economy in FY23 above the FY22 level. This additional burden would be 1.9 per cent of GDP. To soften the impact on consumers, the government might have to further reduce excise duty on diesel and petrol. Assuming a 10-rupee reduction per litre, there could be a decline of 20 billion dollars in excise revenues. According to the report, an impact of 22 billion dollars might be directly borne by Indian households.

Companies will face an impact of about 23 billion dollars, the bulk of which might also will be transferred to households. The increase in commodity prices will have a direct impact on the economy as India imports 85 per cent of its oil requirements. Based on the supply shock, real economic growth could be lower than predicted. The targeted fiscal deficit as a percentage of GDP might be difficult to manage, even if nothing changes in terms of government expenditure. Weakness in markets may also have an impact on the government's receipts. For instance, there is the risk of Life Insurance Corporation disinvestment public issue getting postponed. Meanwhile, inflation, which is already out of the RBI’s comfort zone, could be driven even higher not just by crude oil prices but also by edible oils. The central bank and the economy could face the double whammy of stalling growth and high inflation. So what options do policymakers have for mitigating the economic fallout of the Ukraine war? As oil marketing companies move to increase retail prices in the next few days after keeping them unchanged since November 4th, we have to see to what extent the government is willing to forgo its excise revenue to control inflation. Similarly, with the rupee at an all-time low against the dollar, the RBI has innovative strategies at hand to contain volatility.

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