Business

Declining Crude Prices May Spike The Current Account Deficit And Ring More Inflation

HARSH RANJAN | 0
2601
| January 8 , 2019 , 12:39 IST

The actual inflation and fiscal deficit will finally depend on the level of government intervention (changes in tax and subsidy) in the domestic oil market.

RBI warned earlier that a sudden surge in crude prices can upset the nation’s key macro-stability parameters, as it can sharply spike the current account deficit (CAD), inflation and the fiscal numbers, whittling the benefits of higher growth.

Since the country is heavily dependent on oil imports to the tune of over 80 per cent for meeting its domestic demand, it remains susceptible to global crude price shocks.

A report said, Besides CAD, the rise in crude prices can also impact inflation and fiscal deficit.

The international crude prices increased by around 12 per cent between April and September 2018.

The mid-year spike in crude prices happened mainly due to spurt in demand, on the back of global growth revival, and partly due to geopolitical risks that led to supply-side shocks.

However, since mid-November 2018, the crude prices have declined significantly but they remain volatile.

A media report said, “An increase in crude price worsens the CAD and this adverse impact cannot be significantly contained through higher growth. So, a crude price shock will be followed by high CAD to GDP ratio.”

“Every USD 10/barrel increase in crude prices leads to an additional USD 12.5 billion deficit, which is roughly 43 bps of the country’s GDP. So, every USD 10/barrel increase in crude price will shoot up the CAD/GDP ratio by 43 bps,” the report added.

ALSO READ: Indian Crude Oil Basket Falls Below USD 37, Petrol Prices May Further Go Down

If the government decides on a zero pass-through to the final consumers, a USD 10/barrel spike in crude prices could increase the fiscal deficit by 43 bps.

This zero pass-through scenario allows us to put an upper band on the amount of fiscal slippage, it adds.

 

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