Transfin.
HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. News
  2. Explained

The Impact of Low Oil Prices on Indian Economy

Professor of Financial Economics and Part-time Value Investor, Transfin.
Apr 22, 2020 3:43 AM 2 min read
Editorial

US WTI oil prices fell below zero for the first time ever on Monday. Brent crude is trading in the $20s. The double whammy of the coronavirus demand glut and the Saudi-Russian oil price war has sent oil prices to historic (and quite ridiculous) lows.

 

India being a net importer of oil, many of us might assume that is this is entirely good news for the Indian economy. While the net impact might still be positive, there are other nuanced layers to wonder about. There are both positives and negatives to historically low oil prices. 

 

Black and White

The boons of low oil prices are that it helps cool inflation, helps with fiscal arithmetic in that the import bill is reduced, and drives down prices of many things from vehicular fuel to agricultural fertilisers.

 

But there are cons, too. The export value of petroleum products will take a hit, and close to 90% of the total excise duty the Government generates comes from oil. This will hit Indian oil companies. Disinvestment in the state-owned Bharat Petroleum is also likely to be stalled over declining demand.

 

Then there’s stockpiling. India’s storage facilities in Vishakhapatnam, Mangalore and Padur are reportedly just over half full. Filling them could help down the lane. But storage capacity in itself is a measly 39m barrels. In comparison, China, Japan and South Korea have capacities of 550m, 528m and 214m respectively.

 

Decreasing oil revenue could cajole petrostates to diversify and look at other sources of investment. And they could look to India Inc. But on the other hand, if oil companies in the Gulf decide to downsize or cut salaries, it would hurt the millions of Indian workers working there (and hurt remittances too).

 

Moreover, the opportunities that surface from low crude prices can be lost if growth prospects are feeble (which also hurts demand). Since the beginning of the coronavirus pandemic and the nationwide lockdown, domestic and foreign ratings agencies have slashed India’s GDP growth forecasts. Some of them have even predicted outright contraction in this fiscal. Global growth prospects are similarly bleak. At the same time, a weaker Rupee could offset gains from low oil prices for consumers.

 

For a complete understanding of the impact of oil prices in India, read the Beginners Guide to Crude Oil Basics.

FIN.

The cut-throat world of Business and Finance means that there is fresh News everyday. But don't worry, we got you. Subscribe to our Wrap Up Newsletter and get commentaries like the above straight to your inbox.