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For long now, India's politicians have blamed global headwinds (Europe's sovereign crisis and weak US growth) for the country's macroeconomic stress. Economists have said the rising imports of crude oil and the insatiable appetite of Indians for gold have worsened the problem. But with the recent fall in the prices of the two commodities, global tailwinds are coming to India's rescue, the same people have begun to say. That is because since January 2013, Brent crude had come down 12 per cent to $98.3 a barrel and gold 17 per cent to $1,396 an ounce by mid-April. The fall in prices of both these commodities, it is being felt, will not only dramatically improve India's unwieldy trade deficit, but will also ease the pressure on our fiscal deficit and subsequently drive down inflation and interest rates too. If oil and gold stay at the current levels through 2013, our growth-inflation dynamics could improve for the better.
Why do these two commodities matter so much for the country's wellbeing? As much as 43 per cent of our imports comprise gold and crude oil. India's imports have outpaced exports by a long shot over the last two years, largely on higher gold and crude oil prices in the international markets. On top of that, gold imports have grown sharply along with the price of the precious metal. (Demand has grown 10 per cent year-on-year, which has caused domestic prices to rise 24 per cent per annum for the previous four years.) This has skewed our trade balance. Now, as a result of the recent softening in gold and crude oil prices, India's current account deficit may come down from 5.1 per cent of the gross domestic product in 2012-13 to less than 4 per cent by the end of 2013-14, economists have said. So, any reduction in the international prices of crude oil and gold should be good news for India. But the narrative is not so simple. Let's look at gold first.
Most experts say that a drop in gold prices encourages consumers to purchase more of the yellow metal. HSBC in a recent report said that the dip in gold prices may not help narrow the current account deficit. "Our quantitative analysis supports this. The volume of gold imports rises with higher real incomes, lower real deposit rates, and falling gold prices," says Leif Eskeseen, chief India economist, HSBC. In a research note dated April 17, rating agency CARE too said falling gold prices were unlikely to curb demand and hence would not have a positive impact on the current account deficit. "Our analysis shows that the drop in the price of gold should not have a significant impact on the import bill. This is because the decline in the price is countered by a rise in volumes as Indians take advantage of lower prices to buy more gold," CARE said. Jewellers have reported a sharp increase in sales after the fall in gold prices.
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The fall in crude oil prices too is a double-edged sword. If crude oil prices remain at the same level for some time, the current account deficit is likely to come down to less than 4 per cent of GDP, say some experts. "Since 79 per cent of India's crude oil demand is met by imports, the drop in Brent crude prices to around $100 per barrel would be a huge boost for the current account deficit. About one-sixth of the country's import bill is going to come down because of this," says Debashish Mishra, senior director, Deloitte. India's crude oil imports have increased dramatically over the years from a mere 74.09 million tonne in 2000-01 to 184.5 MT in 2012-13.
However, petroleum products are also the largest item in the country's export basket, accounting for 18 per cent of the total, and hence the net impact of any fall in crude oil prices on the current account deficit won't be much - the value of our exports will come down by the same degree. India's export of petroleum products has increased astronomically from just 8.36 MT in 2000-01 to 63.76 MT in 2012-13. The key exports include petrol, naphtha, aviation turbine fuel, diesel, kerosene, liquefied petroleum gas (LPG), lube oil and bitumen.
However, the cooling down of international prices has turned out to be a big relief on the subsidy front. The under-recovery on the sale of diesel, kerosene and LPG is expected to drop to Rs 84,400 crore in 2013-14, against Rs 161,000 crore in 2012-13, if crude oil prices remain almost in the same range. However, this is still higher than the provision of Rs 65,000 crore made in the budget for 2013-14. For the true benefit of lower crude oil prices to accrue, the subsidy bill needs to fall below Rs 65,000 crore. The oil subsidy is shared equally by the state-owned oil marketing companies, the government and upstream companies, ONGC and Oil India Ltd.
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From as high as $122 a barrel in December, crude oil prices have come down to $99 per barrel this month. According to the petroleum ministry, as a result, the under-recovery has come down to as low as Rs 3.8 a litre on diesel, Rs 27.93 a litre on kerosene and Rs 378.38 a cylinder on LPG. According to the latest figures by the Petroleum Planning and Analysis Cell, the revenue loss for the oil marketing companies has gone down to Rs 256 crore a day from Rs 454 crore a day on February 15. "This is due to the drastic drop in international crude oil prices in the last three months," says K V Rao, director (finance), Hindustan Petroleum Corporation Ltd.
The fall in crude oil prices has definitely brought relief to petrol consumers. Retail prices have dropped by 7 per cent from Rs 67.56 a litre on January 15 to Rs 63.09 (Delhi) on May 1. For the oil marketing companies, the big move has been the government's decision to decontrol diesel prices in a phased manner. With oil marketing companies allowed to raise prices by 50 paisa per month, all under-recoveries on the fuel were expected to be wiped out by early 2015. However, with the international prices dropping, the oil marketing companies expect diesel prices to be at par with market rates within nine months or at the most by mid-2014, depending on global prices. The benefit will accrue only if the government musters the political courage to charge consumers market prices as the country gets closer and closer to the 2014 general elections. "The drop in crude oil prices is good news, but that may not suffice for the differential to be bridged. Other measures like passing on costs to consumers may have to continue," says Deepak Mahurkar, the head of oil & gas practice at PricewaterhouseCoopers.
Lower crude oil prices would bring down inflation by half a percentage point, say experts. The price rise in the fuel index has been in double digits after the government increased the fuel prices last year. But if crude continues to stay at $100/barrel through 2013, then 50-60 basis points could be shaved off headline inflation print (Wholesale Price Index). According to the Asia Economics team of Credit Suisse, a sustained 10 per cent drop in oil price will likely add 10-20 basis points to GDP growth in non-Japan Asia and subtract 50-90 basis points off headline inflation. Lower oil prices improve the growth-inflation dynamics of oil-importing countries like India.
Much will depend on how gold and crude oil prices behave in the coming months. "The outlook for gold still remains bearish, but a steep fall as seen in April is not expected to be repeated as physical demand will be supportive. I feel that the bearish trend will continue for some more time as the dollar is strengthening, inflation is down and so the tendency to purchase gold as a hedge against inflation is diminishing. Equity markets and other riskier assets are giving better returns, so investors are not interested in gold," says Naveen Mathur, associate director, commodities and currencies, Angel Broking. Crude oil prices are difficult to predict. A lot of factors are set to drive the international prices in the coming months. Supply is on the rebound after a brief setback. But prices would depend on the OPEC policies and international scenario - like the reported air strike on Syria by Israel and disruptions in Nigeria, Libya and Iraq.
