Oil shock to slowing GDP

It seems multiple things are going wrong for the Indian economy at a time when the Narendra Modi government has shifted gears to take it beyond $5-trillion mark by 2025.

The latest jolt to the country's gross domestic product (GDP), as the economy is indicated, is the oil price shock. A suspected drone attack ignited fire at Saudi Arabia's oil facilities which account for eight per cent of global oil supplies. Post the attack, Saudi's oil production fell by a half.

Consequently, crude oil prices skyrocketed on Monday. In global futures market, Brent crude oil price, an international benchmark, zoomed by 14.6 per cent, or $8.80, to $69.02 per barrel.

America's West Texas Intermediate (WTI) crude price raced to $62.90 per barrel, registering a single day jump of 14.7 per cent, or $8.05. Crude oil prices registered such a record single-day jump for the first time after the 1991 Gulf War. On Tuesday, crude prices corrected slightly, but still hovered high.

Rise in crude prices destablises the Indian economy, to say the least, as the country meets 70 per cent of its oil consumption needs through crude oil imports.

As a global banking entity indicated, a 10 per cent rise in crude oil prices pushes inflation by 0.2 per cent and widens current account deficit (CAD) by 0.4-0.5 per cent, which means higher import bill. Also, a one US dollar upswing in Brent crude oil price per barrel will increase India's annual oil import bill by Rs 14,500 crore.

The economy is already reeling under the aftereffects of sudden spike in oil prices. In the last two days, Indian rupee plunged by 86 paise to Rs 71.78 per US dollar. Stock markets also reeled under the impact.

Benchmark BSE Sensex shed 262 points on Monday and 642 points on Tuesday to close at 36,481.09 Oil & gas stocks took a huge beating in India. Investors lost Rs 2.72 lakh crore since Monday. Global stock markets also came under pressure.

It is estimated that petrol and diesel prices in India will go up by Rs 5-6 per litre in next one week if the Middle East crisis continues and crude oil prices go up further. That will have a cascading effect on all the sectors. Brokerages like Kotak Institutional Equities feel that the current crisis in Gulf will linger on for a few more weeks.

The crisis will flare up further if Saudi Arabia retaliates for the drone attack on its oil facilities. US President Donald Trump also announced that his forces were ready to take revenge for the attacks. Therefore, there are ample indications that oil prices may go up for next few weeks and there may be supply shortage as well.

However, the Indian government claimed that Saudi Arabia assured it of continuous supply despite the attacks. Nevertheless, our GDP growth hit a six-year low of Rs 5 per cent during April-June (Q1) this year.

The rising oil prices will throw a spanner in the Centre's efforts to put the economy on higher growth trajectory through stimulus measures. So, Indian economy will be under more pressure now. That's sad news for the Modi government and people as well.