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Opec’s output cut to have muted impact

A $10 increase in global crude oil prices shaves off India's GDP by up to 30 bps.

, TNN|
Dec 07, 2019, 11.32 AM IST
(This story originally appeared in on Dec 07, 2019)
Opec’s decision to deepen the production cut by an additional 500,000 barrels per day till March will have a muted impact on the fiscal headroom needed by the government to battle economic headwind, but a temporary bump in pump prices cannot be ruled out.

There are several factors that will soften the impact. The production cut will be in place only for the next three months before being reviewed. This does not offer enough time to siphon oversupply from the market, especially amid tepid demand growth due to the USChina trade war and slowing economic activity all around.


Besides, several new projects are in the pipeline globally, notably in the US and Brazil, that will start coming on stream from next year. This can put the global oil market back to Square One and once again drive prices down towards $50 per barrel-mark. Reports from Vienna, where oil ministers from the grouping and Russia met through Thursday and Friday, suggest the additional 500,000 barrels per day cut essentially redistributes the burden that had seen grouping leader Saudi Arabia implement a deeper cut than its quota to make up for member countries pumping above their allotment.

These factors give the government some comfort as it grapples with a slowing economy. India is vulnerable to oil market volatility as it meets 83% of its crude requirement through imports. So any increase in global oil prices makes fuel costlier for consumers and squeezes the government’s ability to spend on social and infrastructure schemes — key ingredients for reviving economic growth.

Costlier crude pushes up inflation as government’s subsidy outgo and industry’s input cost rise. It also hurts financial and currency markets as higher demand for dollar to pay for oil imports puts pressure on the rupee and upsets the current account deficit. All these depress market sentiments and consumer appetite, which in turn suppresses consumption.

A $10 increase in global crude oil prices shaves off India's GDP by up to 30 basis points (one basis point equals one hundredth of a percentage point).

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