Cooling crude may fire up macros

The more than 40% plunge in the global crude prices over the last two months will ease the pressures on oil import bill, fuel inflation, current account deficit (CAD) and fiscal deficit.

Recent international oil prices have been at their lowest in over a year due to rising supply and worries on demand pick-up because of slowing global economic growth. On Friday, Brent crude oil slipped 56 cents to a low of $51.60 per barrel before moving up to around $52.05.

The crude prices have fallen to the current level after touching a four-year high of $86.29 per barrel in October this year.

This bodes well for the economy as it will reduce the oil import bill, experts told DNA Money. India is a net importer of crude because it meets over 82% of total oil demand through overseas imports.

Sambit Mohanty, senior editor, Asia Oil News & Analysis, said lower crude prices will offer some relief to the government in terms of their expenses on oil imports.

"The fall in crude oil prices will help ease the pressure on India's oil import bill to some extent. Oil marketing companies (OMCs) have started adjusting retail prices accordingly and passing on the benefits to consumers. Slowing industrial growth and trade disputes to some extent have clouded the outlook for global oil demand growth in 2019. Although the oil demand growth rate is expected to remain in the positive territory, it might fall below the growth levels we have seen in recent years," he said.

Just two months back, when international oil prices had surged and rupee exchange rate against the dollar had weakened, the petroleum ministry had projected oil import bill to rise to the highest level of $125 billion, or Rs 8.81 lakh crore in the current fiscal.

"The import bill of crude oil is estimated to increase by 42% from $88 billion in 2017-18 to $125 billion in 2018-19 considering the Indian basket crude oil price of $77.88 per barrel and dollar versus rupee exchange rate of 72.22 for the balance part of the year," Petroleum Planning and Analysis Cell (PPAC), the technical arm of the oil ministry, had said in its report in October.

However, a reversal in global crude prices since November has considerably lowered this forecast. And since one third, or around 30%, of our total imports constitutes of oil, falling oil prices will have a positive impact on trade deficit too.

The CAD in the second quarter – June to September – of the current fiscal swelled to 2.9% of GDP compared to 1.1% of GDP in the same quarter last fiscal, primarily on higher trade deficit of $50 billion against $32.5 billion last fiscal.

Crude ruling lower over the last two months is likely to see CAD narrow in the third quarter. Many economists have already begun slashing their outlook from close to 3% of GDP to around 2.5-2.6% of GDP for this fiscal. Last fiscal it was 1.9% of GDP.

Declining crude will also douse the fuel inflation that is visible more in the wholesale Price Index (WPI) than in Consumer Price Index (CPI).

Fuel was one of the components that had pushed up the annual rate of WPI to 5.28% in November from 5.13% in October. Last month saw cost of fuel and power, which has a weight of 13.15% in the index, rise 18.44% from a growth of 16.65% a month before.

In the same month, among the non-food items, the price of high-speed diesel, on an annual basis, rose by 19.85%, petrol by 31.39% and LPG by 18.44%.

Madan Sabnavis, chief economist at Care Ratings, said if the crude price continued its downward spiral, fuel inflation could soon be seen growing at a single digit rate; "To the extent that oil prices have been down it will have a positive impact on both WPI and CPI. We can expect fuel inflation to come down to a single digit number. If we look at WPI, it (fuel inflation) is still in a double digit number. This will keep coming down to a single digit figure".

According to him, easing crude prices will also marginal bring down the fiscal deficit to the extent of the government spend on subsidies for kerosene and LPG; "subsidy element will definitely come down for the government. It will depend on whether prices are reduced or retained at the same level".

Deepak Mahurkar, partner and leader – oil & gas industry – PwC India, though, does not expect crude to slip in a big way going forward. He believes the 1.2 million barrels per day production cut by Organization of Petroleum Exporting Countries (Opec) and non-Opec members from January may check the current freefall in global crude prices and stabilise them at around the current levels.

"We do not expect too much of price reduction in crude," he told DNA Money.