Surge in crude oil prices will dent India's GDP by 1.2 %
The surge in crude oil prices would be transferring out an incremental 1.2 per cent of GDP for the same net oil imports. To offset the pressure OMCs have increased the prices of fuel and LPG, while it is unlikely to materially support the marketing margins of oil marketing companies (OMCs), but the impact is expected to be seen in April inflation numbers.
Upon commencement of the conflict, crude surged past $100 a barrel, and though there is likely to be an element of overshooting -- there is a growing expectation that, as the conflict gets more entrenched, crude prices could remain elevated for longer.
Indian Public Policy Review's latest journal quoted J.P. Morgan stating...."for example expects crude to average about $100/barrel for 2022 (calendar year) as of March 15. This would constitute a $30/barrel increase from the $70/barrel witnessed in 2021, and thereby constitute a discernible negative term of trade shock for an oil-importing country such as India".
The report further stated, every $10/barrel in crude pieces increases India’s net import bill by 0.4% of GDP. Therefore, crude at $100/barrel would accumulate into an adverse terms of trade (ToT) impact of 1.2% of GDP in 2022 vis-a-vis 2021.
Indian Public Policy Review's latest journal quoted J.P. Morgan stating...."for example expects crude to average about $100/barrel for 2022 (calendar year) as of March 15. This would constitute a $30/barrel increase from the $70/barrel witnessed in 2021, and thereby constitute a discernible negative term of trade shock for an oil-importing country such as India".
The report further stated, every $10/barrel in crude pieces increases India’s net import bill by 0.4% of GDP. Therefore, crude at $100/barrel would accumulate into an adverse terms of trade (ToT) impact of 1.2% of GDP in 2022 vis-a-vis 2021.
Put simply, the economy would be transferring out an incremental 1.2% of GDP for the same net oil imports (crude imports adjusted for petroleum product exports).
Back in 2014-15, the fall in crude prices at the time had delivered a 2% of GDP windfall across four quarters, as we had documented and analysed at the time (Chinoy and Jain, 2015). Now, the shoe is on the other foot.
There will be impacts from other commodity prices, too. Higher coal and gas prices will add to the negative ToT pressures. In contrast, rising aluminium and steel prices (commodities that India exports) and wheat prices (an agricultural export that India could ramp up significantly) could mitigate some of those pressures. The net impact of these opposing dynamics is therefore likely to be more modest. Instead, the primary impact is likely to flow through oil prices.
Petrol and diesel prices on Wednesday were hiked by 80 paise a litre each for the second straight day since the ending of an over four-and-half month hiatus. Petrol in Delhi will now cost Rs 97.01 per litre as against Rs 96.21 previously, while the diesel rate has rose from Rs 87.47 per litre to Rs 88.27, as per a price notification of state fuel retailers.
There will be impacts from other commodity prices, too. Higher coal and gas prices will add to the negative ToT pressures. In contrast, rising aluminium and steel prices (commodities that India exports) and wheat prices (an agricultural export that India could ramp up significantly) could mitigate some of those pressures. The net impact of these opposing dynamics is therefore likely to be more modest. Instead, the primary impact is likely to flow through oil prices.
Petrol and diesel prices on Wednesday were hiked by 80 paise a litre each for the second straight day since the ending of an over four-and-half month hiatus. Petrol in Delhi will now cost Rs 97.01 per litre as against Rs 96.21 previously, while the diesel rate has rose from Rs 87.47 per litre to Rs 88.27, as per a price notification of state fuel retailers.
In Mumbai, petrol price has been increased by 85 paise to Rs 111.67, while prices in Chennai went up by 75 paise to Rs 102.91. In Kolkata, rates increased to Rs 106.34 from Rs 105.51. The diesel price hike in Mumbai was 85 paise per litre. Rates differ from state to state depending on the incidence of local taxes. (Source: https://indianexpress.com/article/business/commodities/fuel-prices-rise-for-second-straight-day-7833526/)
The hike in retail prices of petrol, diesel and LPG was on expected lines, and the impact will largely show up in the April inflation number.Retail fuel prices of petrol and diesel have been kept unchanged since November 2021, whereas global crude oil prices rose by close to $30 per barrel during this period.
The pass-through of rising crude oil prices to domestic fuel prices is, therefore, inevitable, and further hikes can also be expected.
Crisil's base-case forecast for consumer price inflation, at 5.4% average for fiscal 2023, bakes this in. The forecast also assumes Brent crude prices at an average $85-90 per barrel in fiscal 2023.
While lower excise duty relative to last year will help moderate the impact of rising international crude oil prices, it will not be sufficient to lower fuel inflation if Brent prices stay above $90 per barrel throughout next fiscal. In that case, the government may need to cut excise duties further to alleviate the burden on consumers.
Hetal Gandhi, Director, CRISIL Research said “the first hike in fuel prices in five months – by a massive ~Rs 25 per litre for bulk diesel buyers, and 80 paise at the retail level for petrol and diesel – is unlikely to materially support the marketing margins of oil marketing companies (OMCs).
Given that the price of crude oil has averaged ~$100 per barrel in the current quarter, a full passthrough would require a Rs 9-12 per litre increase in the retail prices of petrol and diesel. And if the average crude oil price rises to $110-120, the hike required would be Rs 15-20 per litre, estimates Crisil
Demand for transportation fuels, however, is likely to remain largely inelastic, supported by the ongoing recovery in economic activity. So if there is no full passthrough, OMCs will continue to be impacted.
ends
The hike in retail prices of petrol, diesel and LPG was on expected lines, and the impact will largely show up in the April inflation number.Retail fuel prices of petrol and diesel have been kept unchanged since November 2021, whereas global crude oil prices rose by close to $30 per barrel during this period.
The pass-through of rising crude oil prices to domestic fuel prices is, therefore, inevitable, and further hikes can also be expected.
Crisil's base-case forecast for consumer price inflation, at 5.4% average for fiscal 2023, bakes this in. The forecast also assumes Brent crude prices at an average $85-90 per barrel in fiscal 2023.
While lower excise duty relative to last year will help moderate the impact of rising international crude oil prices, it will not be sufficient to lower fuel inflation if Brent prices stay above $90 per barrel throughout next fiscal. In that case, the government may need to cut excise duties further to alleviate the burden on consumers.
Hetal Gandhi, Director, CRISIL Research said “the first hike in fuel prices in five months – by a massive ~Rs 25 per litre for bulk diesel buyers, and 80 paise at the retail level for petrol and diesel – is unlikely to materially support the marketing margins of oil marketing companies (OMCs).
Given that the price of crude oil has averaged ~$100 per barrel in the current quarter, a full passthrough would require a Rs 9-12 per litre increase in the retail prices of petrol and diesel. And if the average crude oil price rises to $110-120, the hike required would be Rs 15-20 per litre, estimates Crisil
Demand for transportation fuels, however, is likely to remain largely inelastic, supported by the ongoing recovery in economic activity. So if there is no full passthrough, OMCs will continue to be impacted.
ends
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