Effect of Rising Oil Prices on Indian Economy

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A rise in global oil prices by $ 10 per barrel would reduce India's economic growth by 0.2 percentage points and also affect the country's current account deficit, Goldman Sach said.

"A VAR (value-at-risk) analysis suggests that a $ 10 increase in oil would reduce GDP growth by 0.2 percentage point," Goldman Sachs said in its latest edition of 'Asia Economics Analyst'.

India on Monday voiced serious concern over the rising crude oil prices, which have touched a two-year high, and said it could badly affect global economic growth and even give rise to inflationary pressures.

"The current oil prices will spur global inflation and retard economic growth. India feels that this is the concern that needs to be addressed on priority," Minister of State for Petroleum and Natural Gas, R.P. N. Singh said at the 4th Asian Energy Ministerial Round Table in Kuwait.

Mr. Singh said the current rise in international oil prices is a cause for worry not only for emerging economy like India but for the entire world as the recovery from recession is still fragile. Crude oil is currently ruling at around $108 a barrel, necessitating either a sharp increase in domestic fuel prices or a hefty subsidy payout by the government.

At current level, state-owned oil firms are projected to lose a whopping Rs. 177,500 crore on selling fuel if retail prices are not hiked.

Mr. Singh said inefficient fossil fuels subsidies that encourage wasteful consumptions need to be phased out over the medium term, while ensuring targeted delivery of the subsidy to the really needy, so as to provide them access to energy at affordable prices. On the reasons for the surge in oil prices, he said speculation in commodity markets, unregulated over-the-counter (OTC) transactions and trading in paper barrels are to be blamed.

"Given the dual role that crude oil now plays both as a physical commodity and a financial asset, we need to improve our understanding of the inter-linkages between the physical and financial markets, if we are to address the issues of price volatility and price discovery in the oil markets,’’ he said.

He said when oil prices had hit a record of $147 per barrel in July, 2008, India had demanded regulatory mechanisms to prevent the influence of speculators on the price formation of oil.

The Petroleum Minister said for oil prices to be stable and predictable, both oil producers and consumers need to recognise their inter-dependence. “For encouraging investment by the oil producing countries, the oil consuming countries need to be in dialogue with the producing countries so as to assure the producers of a stable demand in times to come,’’ he remarked.

Rise in crude prices has long been serving as a handy whipping boy whenever a downslide in the economy, especially of a developing country, had to be explained (away!). To put it differently, oil prices form an inextricable part of every analysis of a nation's economy. It is invariably the elephant in the living room as far as India is concerned, since India imports three quarters of its annual oil and gas requirements, with its import bills amounting to $18 billion.

To take two latest predictions: Goldman Sachs, based on a Value-at-Risk analysis, came up on April 24 with the finding that a rise in global oil prices by $10 per barrel would reduce India's economic growth by 0.2 percentage points, and also affect the country's current account deficit.

And not to be outdone, Deloitte, on May 30, gave the warning that spiralling oil prices and higher inflation could hurt the growth of the Indian economy, and that the country “will experience the effects of an oil-price shock… rising crude prices and a more generalised inflation threaten to derail the government's plan of achieving approximately 9 per cent growth in the next fiscal”.

This must, however, be juxtaposed with the statement of the Vice-Chairman and MD of M&M, Mr Anand Mahindra, on August 12, that the downturn in...
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