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Oil is once again turning PM Modi’s friend with govt move to boost economy

, TNN|
Updated: Aug 25, 2019, 06.21 AM IST
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PM Modi

Highlights

  • The price drop could not have come at a better time and will support steps to revive growth.
  • Cheaper oil keeps macroeconomic parameters such as CAD (current account deficit) and inflation in the comfort zone by reducing crude import and subsidy bills.
(This story originally appeared in on Aug 23, 2019)
NEW DELHI: Oil is once again proving to be Prime Minister Narendra Modi’s friend when his government is making efforts to fend off a possible slowdown in the pace of economic growth. Crude prices dropped sharply on Friday, the day finance minister Nirmala Sitharaman announced a slew of
measures to boost business
confidence and pump-prime the economy.

US crude plunged over 3 per cent to $53.58 per barrel as China announced fresh tariffs on US goods, clouding hopes of revival in global demand. Right on cue, global benchmark Brent, which is more pertinent for India, fell 2 per cent , or $1.19 to trade at $$58.75 per barrel.

The
price drop
could not have come at a better time and will support steps to revive growth. Cheaper oil keeps macroeconomic parameters such as
CAD
(current account deficit) and inflation in the comfort zone by reducing crude import and subsidy bills.

relief


Low oil prices will help boost demand and reduce input cost for farmers who use diesel to run farm equipment. Lower subsidy liability frees up funds for social sector and infrastructure spending, which are expected to drive economic activity.

A Macquarie Capital report suggests every $10/ barrel fall in oil prices reduces import bill and CAD by $9-10 billion, or 0.43 per cent of the GDP.

When Modi took oath as PM for the first time in May 2014, India was paying about $108 per barrel for the mix of crude it buys, known as the ‘Indian basket’. By the third year into Modi’s first term, the price had more than halved to about $48 per barrel. The crash allowed the government to mop up resources by raising fuel tax and splurge the money on big-ticket social sector schemes.

Something similar is happening again. Exploiting the window of heavy downward pull on oil prices, the government raised fuel tax by Rs 2 a litre in the budget to garner about Rs 20,000 crore this fiscal. Another round of fuel tax hike cannot be ruled out if oil continues to slide.

The Economic Survey for 2018-19 had projected subdued oil prices as demand concerns on the back of economic slowdown outweighed worries over supplies tightening as a result of extended production cut by OPEC-plus grouping amid loss of Iranian shipments due to US sanctions.

Oil has been on an upswing since 2017. Global marker Brent topped $80 per barrel around the time of Karnataka assembly election in May 2018, forcing the government to cut tax twice as fuel prices hit record high. Since then prices have been on a downtrend, except for brief spell beyond $70 in May, and dropped below $60.
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