Photographer: Prashanth Vishwanathan/Bloomberg

For Fuel-Importer India, $50 Oil Seen as Economic Sweet Spot

  • Boon for oil producers, global demand to boost India prospects
  • Can also reverse excise tax duties to limit inflation impact

India hasn’t run out of luck just yet.

While oil that plunged below $30 a few months ago helped India contain inflation and shrink its trade deficit, a rebound to $50 has other advantages for the world’s fastest-growing importer of crude. More cash for fuel exporters could boost global growth, lure commodity-dependent sovereign wealth funds back to emerging markets and increase demand for Indian-made goods, including petroleum products.

“The environment might be better rather than worse for India,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai. Oil at “$60, $65, $70 -- that’s when the problem starts, but right now I think it’s fine.”

The prospect of even higher fuel prices increases the urgency for Prime Minister Narendra Modi to pass a national sales tax and establish a rate-setting panel to meet a nascent inflation target. Central bank Governor Raghuram Rajan is among economists who have credited lower oil prices with benefits such as improving public finances and easing the fastest inflation among Asia’s biggest economies.

Oil prices have long been a key determinant of India’s economic outlook, feeding into exchange rates as well as living costs. The 55 percent plunge in Brent crude since the end of 2013 allowed the government to scrap subsidies on gasoline and diesel and push consumer-price inflation below the central bank’s 5 percent target for March 2017.

Now declining global stockpiles are reversing the slump, increasing anxiety among investors such as Uday Kotak, the billionaire founder of Kotak Mahindra Bank Ltd. CPI rose a steeper-than-expected 5.4 percent in April and the economy may see a reversal in recent improvements in the broadest measure of trade.

“As oil touches $50 India’s honeymoon on inflation, current account may be over," Kotak wrote on Twitter on Tuesday. That puts the onus on policy makers to help drive growth instead of depending on the external environment, he said.

Rising crude prices may also force the government to roll back increases in excise taxes, forcing it to find alternative sources of revenue to hit its budget-deficit target. While the government doesn’t publish an oil-price estimate in its budget, Finance Ministry officials have indicated that they’d seen it averaging about $50 in the year through March 2017.

Modi has rebuffed critics who say he’s gotten lucky with low oil prices, saying in March that the pick-up in India’s economic growth is due to "prudence, sound policy and effective management." Since then, the government has taken steps to block a tax-evasion loophole and lawmakers have cleared a bill to overhaul the nation’s archaic bankruptcy laws.

One piece of good news for Modi is that the weather department predicts above-normal rainfall this year -- the best since 1994 -- following two back-to-back droughts. That stands to boost harvests and keep food costs in check.

A good monsoon would also reduce the need for fuel as farmers wouldn’t have to rely on diesel-powered pumps to irrigate their fields, said Aditi Nayar, an economist at ICRA Ltd., the local unit of Moody’s Investors Service.

On balance, the risks won’t become serious until oil reaches $75 a barrel, according to D.K. Joshi, an economist at Crisil Ltd.

“Oil staying at $50 doesn’t hurt anyone," Joshi said. "It may rather be good in the overall scheme of things.”

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