Every $10 per barrel jump in oil price brings down GDP by 0.3 percentage points: Economic Survey–Business Today–30.01.2018-1——*****

The Economic Survey 2017-18 tabled in Parliament by Finance Minister Arun Jaitley predicts India’s GDP to grow 7-7.5 per cent in 2018-19, an increase from its prediction of 6.75 per cent growth this fiscal. The survey points out that in terms of variation in oil prices, India experienced a positive terms of trade shock in the last three fiscal years in terms of fiscal and current account deterioration. However, in the first three quarters of 2017-18, the oil prices have been about 16 per cent greater in dollar terms than in the previous year. According to Chief Economist Adviser to the government, Arvind Subramanian, the price variations in the oil market significantly impacted the Indian economy. He said on Monday that every $10 per barrel increase in oil price brings down GDP by around 0.2-0.3 percentage points and worsens the CAD (Current Account Deficit) by about $9-10 billion dollars.

The survey highlights that against the emerging macroeconomic concerns, policy vigilance will be necessary in the coming year, especially if high international oil prices persist or elevated stock prices correct sharply, provoking a ‘sudden stall’ in capital flows. “High oil prices (at current levels) remain a key risk as they would affect inflation, the current account, the fiscal position and growth, and force macroeconomic policies to be tighter,” says the survey.

With the increasing trade, expectations are that India’s external sector would see growth. “The prospects for India’s external sector in this and coming year look bright, says the survey, with the world trade projected to grow at 4.2 per cent and 4 per cent in 2017 and 2018, respectively, from 2.4 per cent in2016; trade of major partner countries improving and above all India’s export growth also picking up,” says the survey, adding that the downside risks lie in the rise in oil prices. However, this could also lead to higher inflow of remittances which have started picking up, it adds.

Though concerns have been expressed about growing protectionist tendencies in some countries but it remains to be seen as to how the situation unfolds, says the survey, adding that some factors, including the possibility of an increase in crude oil prices in the international market, could have dampening effect on the GDP growth in the coming year.

Over the coming year, the government will need to focus on stave off any nascent threats to macroeconomic stability, notably from persistently high oil prices, and sharp, disruptive corrections to elevated asset prices, the survey predicts.

If these objectives are achieved, the world economy maintains its growth momentum, and oil prices do not persist at current levels, the Indian economy should resume converging towards its medium-term growth potential that previous Economic Surveys have estimated to exceed 8 percent. India would then regain its status as the fastest growing major economy. India has two underlying macroeconomic vulnerabilities, its fiscal and current accounts, both of which tend to deteriorate when oil prices rise.

At the same time, average oil prices are forecast by the IMF to be about 12 percent higher in 2018-19, which will crimp real incomes and spending – assuming the increase is passed on into higher prices, rather than absorbed by the budget through excise tax reductions or by the oil marketing companies. And if higher oil prices requires tighter monetary policy to meet the inflation target, real interest rates could exert a drag on consumption.