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The drop in global oil prices could help India see a current account surplus in the January-March quarter, after 32 quarters of a deficit.
For 2015-16, the current account deficit could halve to 0.6 per cent of gross domestic product (GDP) from 1.2 per cent the previous year. “This is led entirely by the fall in oil prices, even after accounting for countervailing pressures of rising domestic demand on non-oil imports, and a sluggish outlook on exports,” say HSBC economists Pranjul Bhandari and Prithviraj Srinivas.
Bhandari and Srinivas said in December they were working with an oil price forecast of $79 a barrel over the medium term. “Prices have plummeted to $59.9 a barrel (February 3). The forward curve now suggests prices will drift up slowly over the course of the year to end-2015 at a little over $60 a barrel and towards $68 by the end of 2016. This lower trajectory is a significant supply shock for India, with favourable implications across macro variables — real income improvements, lower inflation and subsidy bills and improving external accounts,” they said.
Some negative implications are also possible, they add. For example, if the decline in oil is due to a weaker global growth outlook, as in 2009, the impact from weaker exports could partially offset the positive influence on the domestic economy. India’s growth being largely driven by domestic sources and oil being a key input for economic growth, declines in its price are usually a net positive.
"However, in the current scenario we were inclined to lower our GDP growth projection despite the influence of lower oil prices. This was done mainly to reflect a delay expected in the capex cycle recovery. We now see GDP growth at 5.3% in FY15 (5.5% earlier), 6.3% in FY16 (6.5% earlier) and 6.8% in FY17 (7.1% earlier)," they said.
HSBC estimates that about half of the fall in oil prices has been allowed to transmit to lower retail prices, the remaining will manifest itself as higher tax revenue. "We expect the government to use this bounty to increase capital spending in the upcoming fiscal, which is positive for growth," the note said.
