One and a half years is a reasonable time period to start assessing the performance of a new government. In the big picture of steady GDP growth, inflation, stable rupee, interest rates and foreign exchange reserve position, it’s easy to miss out the contribution of the drop in global crude oil prices, currently at 11-year low.
Crude oil presents the single largest import bill for India’s exchequer as almost three-fourths of the country’s crude oil needs are met from imports.
Do Prime Minister Narendra Modi and Finance Minister Arun Jaitley have a lot to thank sliding global crude oil prices? Probably so, at least at this point of time.
Among the few scores and misses at 2015-end one would be tempted to harp on the government’s inability to yet again to miss out on getting GST passed even as it attempts to push through the Bankruptcy Bill in the last few days of the winter session; shrinking exports and imports, high bank bad debts, and lack of fresh corporate investments.
On the positive side, reining in inflation was a prime success, even though it was mainly by the efforts of Reserve Bank of India and foresight of Governor Raghuram Rajan. Then, the beginning of state spending on infrastructure and railways, and steady growth of GDP (in the numbers though much less on the ground) in addition to keeping fiscal deficit and current account deficit under check, as also keeping the rupee and interest rates stable.
Morgan Stanley, in a study released Dec 22, 2105, said drop in crude oil prices has saved us $46 billion. Oil prices dropped from a recent high of about $115 per barrel to lower than $40 per barrel. Newspaper reports suggest Goldman Sachs and CLSA predict oil prices may halve from the current levels to about $20 per barrel. A key reason for this good news is likelihood of slowdown in global growth.
"With oil prices continuing to decline, India’s oil import bill is likely to nearly halve from the peak seen in quarter ended December 2012," Chetan Ahya, Asia Pacific economist at Morgan Stanley said in a report. "Indeed, crude oil prices (Brent) have declined by 19 percent month-on-month in December and 67 percent from the near-term peak of $115 per barrel in June 2014."
Net oil imports fell by 2.8 percent of GDP in the last three years, from 5.8 percent of the GDP as of December 2012 to 3 percent at present. If oil prices stayed at $40 over the next 12 months, net import oil bill could fall to 1.9 percent of the GDP, he said.
A major part of the gains to India came during 2015, helping Modi and Jaitley present a rosy picture of the economy. An immediate fallout of lower crude prices is slowing of inflation rate, which on oil prices at $100 per barrel would have surely put the economy under great stress. Cheaper oil gave RBI the confidence to cut its key interest rates as smaller import bill helps directly and indirectly narrowing the twin deficits - fiscal deficit and current account deficit.
Cheaper oil enabled the government to control its subsidy burden, and increase excise collection on oil products. By the March 2016, Ahya estimates oil subsidy burden could be virtually negligible if not eliminated from 1 percent of GDP in 2013. On a net basis, total gains to the government could be 1.5 percent of GDP, he estimates.
Yet, fall in oil bill has not been an unmixed blessing. Exports to oil exporting countries have declined. India’s exports have declined for a 12th straight month, though it also reflects a slowdown in global economy.
Investments into Indian stocks and bonds too have declined from these countries. Investment from Gulf-based Sovereign Wealth Funds are a significant source of inflows into Indian portfolio investments.
To be fair, Modi acknowledged this unexpected blessing during campaigns for Delhi and Bihar elections. One only prays the government is able to act fast on other fronts before we lose the benefit of these manna from heaven.
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