Will the build-up in crude oil prices put India’s growth under stress?

India has long benefitted from lower crude oil prices, especially as energy demand has seen considerable rise with rapid economic growth. The southward movement in crude oil prices started during the latter part of 2015 on account of rapid expansion in unconventional sources, shift in OPEC policy, and changing market sentiments.

However, after marking a period of easing, oil prices started their up move beginning Nov’2017 and have now reached a USD 80 per barrel mark. We expect crude prices to see further hikes, as stifled supply and rising demand will likely push it in the USD 75-85 per barrel2 range in the near term. A key reason for rise in crude oil prices in the recent past can be attributed to rising geopolitical risks, as well as on account of OPEC members and others holding their commitment for production cuts.

Currently, imports of crude oil accounts for more than 87% of the total energy demand while the remaining is met via in house production capabilities. With limitations to production capacity and a corresponding rise in energy demand, it is safe to assume that imports of crude oil are likely to inflate in the period ahead. To provide clarity, oil & gas account for close to 35 % share in India’s energy consumption3 and should oil prices continue to remain at high levels, the Indian economy is looking at a scenario of higher inflation along with higher deficits, which may likely divert resources from consumption as well as productive investment. Even a partial pass-through of global increase in prices would imply that the oil marketing companies will have to absorb the underlying losses, ultimately putting pressure on public finances.



Information for the editor for reference purposes only

The authors are Richa Gupta, Senior Economist and Partner Deloitte India and Umang Aggarwal, Economist Deloitte India

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