DNA Edit: Prelude to a storm - Slump in crude oil prices could have different meanings

Amazing as it may seem, both experts and the laymen see in crashing global crude prices, an opportunity for the ruling party to make electoral gains. International oil prices, which have been going down since November, are finally reflecting in the fuel prices after a short time lag.

On Wednesday, the petrol price in Delhi was at a one-year low of Rs 69.79 a litre, while diesel slipped to Rs 63.93 a litre. With overseas crude trending downwards, domestic fuel prices are only expected to go down further as oil marketing companies (OMCs) will pass on their gains to consumers.

So in a sense, a beleaguered government at the receiving end of repeated opposition jibes and public despair could finally heave a sigh of relief. While it would be premature to conclude that a dip in oil prices will automatically beef up the political prospects of the ruling party, there is no doubt that the hapless public, groaning under the onslaught of spiralling inflation, would breath easier.

In the best case, what the government can do is to hope for correction as the lowering of crude oil prices is likely to reflect in petroleum products. It is, of course, no small coincidence that election times have coincided with such corrections.

The conventional wisdom is that a political party has the advantage of going into polls with low oil prices. The impact of lowering fuel prices will be undoubtedly felt, nowhere more profoundly than a lower import bill, this country’s primary concern.

India, which imports over 80 per cent of its oil needs, spent $87.7 billion on importing 220.43 million tonnes (MT) of crude oil in 2017-18. For 2018-19, the imports are pegged at almost 227 MT. Fanned by a higher oil import bill, the country’s trade deficit, or the gap between exports and imports, in July this year widened to $18 billion. Trade shortfall, naturally puts pressure on current account deficit (CAD), a key vulnerability of the Indian economy.   

Power prices will come down and the favourable impact of the twin deficits — fiscal and current account — is certain to have a spillover impact on monetary policy, consumption and even investment behaviour. The government will, perhaps, have slightly more leeway in spending than it has had so far in the days when crude prices were going through the roof.

When this government had come to power in 2014, crude prices had hit rock bottom. But the bigger worry is that this feel-good factor may not just be short-lived, but also the proverbial lull before a firestorm breaks out. It would be tempting to explore if this global crude slump is be linked to an oncoming slowdown.

The ghost of 2008 is still fresh, barely a decade ago, and some economists are predicting the cyclical nature of such downturns. The last few months have seen global crude falling over 40 per cent from around $86 per barrel in October to $50 per barrel today. On Wednesday, Brent crude oil futures slipped 22 basis points to $50.36 a barrel, the weakest since August 2017.