How US diktat wrecks oil bill, rupee

Rising petrol/diesel prices, along with falling rupee, has the potential to create a stumbling block for Narendra Modi's juggernaut in 2019. High oil prices along with corresponding higher gasoline prices is also making life tough for the US government as crucial mid-term congressional elections in November draw near. But it has not stopped the Trump administration from preventing the less-expensive Iranian crude being exported to India and other oil-hungry countries, a measure that could have softened international oil prices.

The benchmark Brent crude breached the $80 per barrel price point last week, its highest level since May, amid concerns over the Trump's target of zero Iranian oil exports by November. The Paris-based International Energy Agency (IEA) has warned that oil prices could settle above the $80 mark, making the $70-to-$80 a barrel range seen in recent months a thing of past.

Reports suggest that high oil/gasoline prices may wreck Republican chances to hold onto key seats in November and retain control in Congress. This is something that Trump would want to avoid. The US Energy Secretary Rick Perry has already reached out to Russia and claimed that the US, Russia and Saudi Arabia are working together to ensure the world has access to affordable energy. IEA doesn't believe the plan's efficacy, though.

India, on its part, has gone weak in the knees and failed to seek a waiver for importing Iranian crude at the recently-held 2+2 bilateral talks.

Reducing oil imports from Tehran, which offers discounted oil to India traditionally, will play havoc with India's crude oil bill. Following a directive from India's oil ministry, domestic refiners have already reduced imports from Iran. India, Iran's second largest crude buyer behind China, imported about 5.23 lakh barrels per day (bpd) of oil in August, down 32% from the previous month. September and October loadings will drop to less than 12 million barrels each, nearly half from earlier this year.

Of late, Indo-US bilateral trade talks are primarily hovering around the US concerns over the trade balance with India, currently in India's favour. Commerce and industry minister Suresh Prabhu recently said that India's purchases of commercial aircraft and gas from the US will help bridge the trade deficit between the two countries. He hopes that it would dip in the current fiscal from the $21 billion trade surplus India reported in 2017-18. This may sound strange when India strives to improve its current account deficit (CAD) position, primarily driven by India's widening import bill, and then, prevent the rupee from further weakening. Rising crude oil price also means inflation.

After India reduced import duty on superbikes by 5-25% a few months ago, dealers of fully-built imported motorcycles such as Harley Davidson (from the US) are reporting double-digit growth in sales. Motorcycles with engine capacity of 800cc or less and those above 800cc, imported as completely built units (CBU), were slashed to 50%, from the earlier 60% and 75%, respectively. This is when all luxury cars imported as CBU, mostly from Europe, continued to pay above 100% duty.

Bowing down to the US should not be at the cost of India's oil bill, rupee and inflation. A simultaneous rise in oil price along with a drop in rupee can be as disastrous as a hurricane and leave a trail of destruction in its wake ahead of the general elections in 2019.

The writer is editor, DNA Money. He tweets @AntoJoseph