The decision of the Organization of Petroleum Exporting Countries (OPEC) to increase crude output by one million barrels per day is expected to have a salutary impact on international oil prices. The enhanced output beginning next month will help large oil consumption countries like the US, China and India to deal with shortages and help re-balance their budgets. Every one dollar reduction in crude prices globally would translate to $1 billion in savings vis-à-vis oil subsidies incurred by the Indian government on about 100 million tonnes of crude imported annually. This will not only help the government to reduce retail prices of petrol and diesel but also deal with localised shortages in some pockets. Already, retail prices of both petrol and diesel have been on a southward journey for the last couple of weeks.
On the macro-economic front, the Narendra Modi government will be able to present manageable numbers. Lower crude prices will give enough elbowroom to the BJP and the central government for negating an opposition-sponsored campaign against high fuel prices. Also, inflation – both consumer and wholesale – is bound to see a dip, pushing up consumption demand for goods and services. The big question is how much would be the net addition to output in crude given that the third largest exporter, Iran, and Venezuela face sanctions slapped by the US and supported by the European Union. A rough estimate suggests that net additional crude output may be in the range of 600,000 to 800,000 barrels.
Initial reports indicate that Iran may not be in a position to scale up its output immediately. OPEC members or non-OPEC crude exporters like Russia may not be allowed to come up with equivalent additional output. If this happens, then crude prices may not slide from $80 per barrel right away. Being labelled the fastest growing global economy with 7.7 per cent GDP uptick may not help India if the crude prices do not moderate in the next couple of months. From a low of $26 previously, the $80 per barrel crude price today has made the outlook grim for the Indian finance minister. He may not be able to make adequate allocation for pet development and social welfare projects if the crude import bill continues to bulge. This may not work well politically either as Prime Minister Modi prepares to seek another term in office next April when the Lok Sabha elections were due.
China may not be perturbed beyond a point given its huge currency reserves and 20-year crude and gas supply arrangement with Russia outside the dollar trade. The US may fall back on shale gas and its strategic crude reserves to tide over the high prices scenario internationally. On the other hand, India will face the biggest problem with nothing to fall back upon. The only glimmer of hope is sourcing enhanced quantities of crude from Iran that’s virtually been shunned by major powers. India and Iran’s cosy arrangement for payments in rupees and barter deals could be to New Delhi’s advantage. The raging trade war between the US, China and the European Union is expected to lend volatility to oil prices given the increasingly protectionist tendencies being exhibited by President Donald Trump. Also, the supply side disruptions could play its part especially when crude begins movement from Venezuela. Interim finance minister Piyush Goyal will have to deftly manage central finances in the absence of his senior colleague Arun Jaitley. Also, budget making for next fiscal may be impacted by crude prices, if they do not hover in the $ 50-$60 per barrel range. Thirdly, reining-in fiscal deficit at 3.3 per cent may still become very tricky without slashing welfare spending especially on flagship schemes like Ayushman Bharat. Mobilising extra budgetary resources will be the key to presenting a pre-election budget of sorts the finance minister.