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Oil price surge will push India’s CAD up to 2.5% of GDP, says SBI.


Date: 22-05-2018
Subject: Oil price surge will push India’s CAD up to 2.5% of GDP, says SBI
Even though oil is now considered less of an independent driver of business cycles than before, the State Bank of India (SBI) on Monday said the recent surge in crude oil prices is likely to impact the country’s imports and stretch the ongoing fiscal’s current account deficit (CAD) to 2.5 per cent of GDP.

In an SBI Ecowrap report, titled “Oil on boil: It’s time we understand oilnomics better”, Chief Economist Soumya Kanti Ghosh argues that its estimate that a $10 per barrel (bbl) increase in oil price will increase India’s import bill by around $8 billion is a “model estimate and actuals could be much different from them”.

Transport fuel prices in Delhi crossed previous highs on Monday. Petrol per litre in Delhi under the dynamic pricing regime touched a record high of Rs 76.57, having already beaten on Sunday the previous high of Rs 76.06 in the city on September 14, 2013. Diesel went to its highest level of Rs 67.57 per litre.

“Our model estimates suggest that $10/bbl increase in oil price will increase import bill by around $8 billion. This in turn will decrease GDP by 16 basis points (bps), increase fiscal deficit by 8 bps, CAD by 27 bps and inflation by 30 bps,” the report said.

“However, we maintain these are model estimates and actuals could be much different from them. For example, since June 2017, oil price has increased by $23/bbl, but the direct and indirect impact on CPI has only been 26 bps.”

Ghosh said: “On the whole, we believe that oil is now thought to be less of an independent driver of business cycles than was previously believed. For example, when oil prices collapsed post 2014 global growth did not pick-up materially.”

“Sadly, in India, we have the boring monologue from all researchers/ economists/ regulators of the catastrophic impact of oil price hike. In particular, diffusion of technology, use of alternate sources of energy (increase of 1.4 times in use in the last 4 years in India) and most importantly abundance of skilled labour leading to muted increase in real wages is keeping inflation in check.

“For example, in India wage bill of listed companies is projected to grow only by a meagre 2.9 per cent in 2017-18.”

Ghosh also refuted the argument of an impending rate hike by the Reserve Bank of India (RBI) on the face of the surge in oil prices.

“We find that oil price as such has not led to countries switching to rate hikes. It is more related to the respective domestic economic developments,” he said.

At its first bi-monthly monetary policy review of the fiscal in April, the RBI retained its key interest rate at 6 per cent for the fourth time in succession, citing rising oil prices as a major upside risk to retail inflation that rules over the central bank’s median target of 4 per cent.

India Inc. on Monday called for the government to urgently reduce fuel excise duties.

In a statement here, industry chamber Ficci cited the government’s latest Economic Survey 2017-18 which has estimated that for every $10 per barrel rise in crude prices, while GDP growth will reduce by 0.2-0.3 percentage points, the current account deficit will increase by 0.4 percentage points and wholesale inflation will go up by 1.7 percentage points.

“Unless swift action is taken to address the situation, the economic growth will again head towards a speed-breaker. Amongst the most immediate actions that can be taken by the government is to bring down the excise duty on fuel,” said Ficci President Rashesh Shah

Source: financialexpress.com

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