Oil Economics

wealthymattersSo how will falling crude oil prices benefit India? The slide in crude oil prices to four-year lows is a huge positive for India as the country depends on imports for more than three fourths of its consumption. It is expected to help improve pivotal macroeconomic indicators such as current account and fiscal deficit besides giving a fillip to energy firms, tyre makers and consumer companies.

India’s net imports of crude oil amount to about a billion barrels every year. So, if crude oil prices average about $100 per barrel in the current fiscal (vs about $106 per barrel in the first six months of the financial year), the country’s import bill will fall by $10 billion (about Rs61,000 crore), which is close to one-third of the current account deficit or CAD in 2013-14. Analysts say that if crude oil averages at $100 per barrel this fiscal, India’s CAD will reduce to 1.3% of GDP from 1.7% in the previous year.

Cooling crude prices will also help bring down fuel underrecoveries (cost of selling LPG & kerosene below cost), lowering the government’s share in the total under-recoveries and, therefore, resulting in narrowing of fiscal deficit. According to global brokerage CLSA, oil under-recoveries are likely to decline 40% in FY15, compared to the previous fiscal, to Rs83,500 crore and a further 20% in the next fiscal to Rs66,600 crore due to the fall in crude oil prices. PSUs such as HPCL, BPCL and IOC are set to gain as cheaper crude will reduce their working capital requirement, thus reducing their dependence on subsidy payout from the government. Tyre makers can look forward to an improvement in margins since 25-35% of their raw material is based on crude oil. Similarly , consumer companies will benefit from lower cost of packaging, which is derived from crude oil.


About Keerthika Singaravel

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