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The price of oil is falling. Barrels of oil, money and infographics against the background of the globe and world currencies. Vector illustration, concept on a blue background.

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WORLD AFFAIRS The ‘crude’ consequences for India!

May 19, 2020

With the crude price falling, it has had a severe effect of both, oil-importing countries and oil-exporting countries. Amidst a global economic recession, India recently announced a 20-lakh crore stimulus package for a ‘self-reliant’ India. The opinion editorial analyses the effects of crude price fall on the globe and India, and if & how this price fall can contribute to revive the economy in anyway, while India has announced a financial support package, which is ultimately a big spend & pressure on the economy.

While the global economy is witnessing a recession worse than 2008, India is working towards moving off that trajectory. India, in its Union Budget analysis of 2020-2021, had the fiscal deficit targeted at 3.5% of GDP. With the 20-lakh crore economic stimulus package (10% of GDP) being announced, the country’s fiscal deficit is likely to shoot up to 7.9% in the current financial year, according to an SBI research report.

It is obvious that these stimulus packages cannot be offered with declining reserves. With the lockdown and businesses hitting absolute lows, the government has to think of alternatives to fill up its reserves. Also, an additional pressure of diminishing reserves means an increasing threat of inflation for the country. In the present situation, where the country doesn’t have a source to generate revenue, the crude price fall is positive news for the country. India, the third-largest crude importer, spent an estimated ₹8.81 lakh crore to import crude in 2018-2019. But the current price fall may leave the country with a positive current account balance. The increase in export and timely fall in the import bills can act as a significant pillar to revive the economy.

While the oil and gas sector contributed to around 3.8% of the global GDP in 2019, the year 2020 doesn’t seem to bode well for the industry. A fallout between the three largest oil shareholders of the world, the US (19%), Saudi Arabia (12%) and Russia (11%), is what resulted in a dip in the oil prices. Despite the countries reaching an agreement to produce 9.7 million barrels per day, the low demand due to the lockdown couldn’t prevent the futures of Western Texas Intermediate (WTI) hitting negative $37.63 and Brent crude declining to $25.57 a barrel on April 21, 2020. While major oil-producing countries can sustain through the period of low demand & price fall, smaller oil-producing countries like Iran, Iraq, Azerbaijan, etc will be the worst hit. The same would be the case for the US oil syndicates. While giants like Chevron, Exxon Mobil, BP have enough financial reserves to navigate through this price crash, smaller oil drilling companies there might suffer unless government assistance is offered.

The present situation could act as a cushion for oil-importing countries, like India’s dying economy. Despite the low price of crude, the central government hasn’t passed on its benefits to the citizen. In fact, there has been an increase in excise duty on petrol by ₹10 & diesel by ₹13 (retail unaffected). This is done with an intent to fill up the otherwise emaciated reserves. Also, Atanu Chakraborty, the Economics Affair Secretary of India, has expressed that India has no liquidity issue and enough foreign exchange reserves. So, India should use this opportunity to improve its oil storage facilities and buy in oil during the present price crash. In the long-term, it could help the country in containing its fiscal deficit and adjusting of the RBI monetary policies. India should focus on making the best out of this incentive fall to curb the falling GDP growth. This could also help set a growth pedestal helping the country become more ‘self-reliant’, like the agenda mentioned by the PMO.

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