Abqaiq / New Delhi: A record gain in crude oil prices could further aggravate India’s fiscal situation and make it tougher for the government and the central bank to effectively combat a slowdown in economic growth. With drone attacks on Saudi Aramco’s facilities causing the biggest ever disruption in oil suppliers, India is preparing to stem the impact of the price surge. Saudi Aramco has, however, assured India that it will honour its supply contracts despite the production cuts, Indian government officials said on condition of anonymity.
India’s current account and fiscal deficits could worsen if oil prices remain at the elevated level, Reserve Bank of India governor Shaktikanta Das warned. International benchmark Brent crude futures soared as much as 19.5 per cent to $71.95 per barrel. Some traders are speculating that oil prices may cross the $100 mark again. Crude prices hit a record $147 per barrel in July 2008.
The surge in oil prices comes at a time when the Narendra Modi government is trying to boost the economy after GDP growth slumped to the slowest in more than six years. An increase in inflation stoked by higher fuel prices will also leave less space for RBI to cut interest rates to combat the slowdown.
“India’s crude imports averaged 4.5 million barrels per day over the first seven months of this year, of which close to 20 per cent were imported from Saudi Arabia. As such, India is vulnerable to prolonged lower crude supplies from Saudi Arabia even though the country has some SPRs (strategic petroleum reserves) and commercial crude stocks as cushions in the short term,” Jy Lim, an oil market analyst at S&P Global Platts
India imports more than 80 per cent of its oil requirements and around 18 per cent of natural gas. Every dollar increase in the price of oil raises the import bill by Rs 10,700 crore on an annualized basis. India spent $111.9 billion on oil imports in 2018-19.
“Of the cargo contracted from Saudi Aramco for September, we have already received a major part. We have been told that they will be using other ports to ship the balance, though the grades may vary,” an Indian government official, one of those cited earlier, said on condition of anonymity.
Fear for petrol price
The geopolitical event has raised fears of a rise in fuel prices in India, which in turn may stir demand for return of state control on fuel pricing. State-run Hindustan Petroleum Corp. Ltd (HPCL) said the price of petrol and diesel at retail outlets might rise if the price of crude stays at current levels. “Price of product at fuel outlets might be impacted if crude price continues to go up by 10 per cent,” chairman of HPCL, Surana told media.
Fuel retailers fix the price of petrol and diesel based on the average of the benchmark price of petrol and diesel of the last 15 days in West Asia. Lower oil prices in the past few years had improved India’s terms of trade. “We are comfortable till $80 per barrel and have been told that is a short-term phenomenon. Our diplomats are in talks with Saudi Arabian government,” said one of the government officials cited earlier. “We have reviewed our overall crude oil supplies for the month of September with our OMCs. We are confident there would be no supply disruption to India. We are closely monitoring the evolving situation,” oil minister Dharmendra Pradhan said in a post on Twitter.
India has oil reserves equivalent to at least 75 days of net imports. This will increase further to 87 days once the second phase of Indian Strategic Petroleum Reserves, which aims to add 12 days of crude storage, is operational. This includes the refineries’ inbuilt capacity of 65 days. A spurt in global prices will affect India’s oil import bill and its trade deficit. An inflated import bill could further widen the current account deficit, which has widened to $57.2 billion, or 2.1 per cent of GDP, in 2018-19 from 1.8 per cent a year ago.
The cost of the Indian basket of crude, which averaged $47.56 and $56.43 a barrel in FY17 and FY18, respectively, was $59.35 in August, according to data from the Petroleum Planning and Analysis Cell. The average price was $59.35 a barrel on 13 September. The Indian basket of crude represents the average of Oman, Dubai and Brent Crude.