India has become an unwilling victim of the civil war in Iraq. Increase in international crude oil prices threatens to increase the fuel subsidy burden and if the crisis spins out of control, it has the potential to hit India’s attempt of an early economic recovery. For India’s finance minister Arun Jaitley, the situation throws all the calculations to control the fiscal deficit out of gear. With subsidies rising, he will be forced to cut government spending further.
The rise in global crude oil prices could widen the Current Account Deficit (CAD), which the government was able to bring down partly by putting curbs on gold and silver imports.
Some analysts are already making comparisons with the 1990 Gulf War, which had sent oil price soaring. Some believe that India’s economic crisis of 1990-91 was also caused by the first Gulf War. However, unlike 1991 when foreign currency assets came down to $1.2 billion, India right now has foreign currency assets of $286.59 billion. But the Iraq crisis could still pose some headaches for the country’s economy.
The price of Indian crude oil basket has already shot up from $105.69 per barrel in early June to near $112 a barrel on Thursday. Some analysts predict that it will add around $ 4-5 billion to the country’s oil import bill. Brent crude oil, which is the index for international oil prices, held near $115 a barrel on Friday, close to a nine-month high. Some analysts are predicting that it will touch $120 a barrel.
India is a large importer of energy and in 2013-14, net energy imports were 6.3 per cent of GDP.
Energy is only partially liberalised, with the government picking up the tab for any discrepancy betw-een international and dom-estic prices. Diesel is the big one, accounting for aro-und 45 per cent of losses incurred by oil companies.
Last year, the government had allowed PSU firms to raise diesel prices by 50 paise every month till its under-recovery was fully exhausted. Due to this, the under-recovery on diesel has come down to '1.62 a litre and the fuel could become de-regulated in the next three months.
But, if the global price of crude oil rises sharply, the under-recovery will incre-ase and the losses will start to widen again. “A $10 per barrel sustained increase in the price of oil, under the current policy setting, could add a fiscal burden of up to 0.4 per cent of GDP,” stated a HSBC Global research report.
While petrol is a de-regulated commodity, it will test the resolve of the government to keep it so in case it warrants a huge hike if the Iraq crisis worsens.
While India was already worried that a weak monsoon would increase food inflation, rising crude oil will only aggravate the problem. According to estimates by the RBI, a $10 per barrel increase in crude oil price, if sustained, can pu-sh up inflation by 1 per cent directly, and by up to 2 per cent if indirect effects are taken into account.
Inflation is already at a five-month high of 6.01 per cent due to rise in food articles and fuel prices. In case the government hikes die-sel and petrol prices by a huge margin, inflation will see a big jump.
Iraq is India’s second largest crude oil supplier. In the current year, the public sector oil marketing companies had planned to import 19.4 million metric tonnes crude oil from Iraq. Against the 18.7 MMT of crude oil imports planned by the two OMCs from Iraq in 2014, 50 per cent of the contracted quantity has already been lifted. Petroleum ministry has said that supplies from Iraq come from the Basra oilfields, situated well away from the conflict zone.
