As crude oil prices soared above $80 a barrel for the first time since November 2014, government number-crunchers are feeling fidgety, as it will affect inflation, current account, fiscal position and growth, and call for tighter macroeconomic policies.
Encapsulating all those fears, the leading stock market indices slumped in the last hour of Thursday’s trading session. The 30-share BSE Sensex fell 238 points or 0.67 per cent to close at 35,149. The 50-share NSE Nifty fell 58 points or 0.54 per cent to close at 10,682.
The recent price spike is being attributed to geopolitical and geoeconomic risks, political upheaval in West Asia, and aggressive decisions on output by Saudi Arabia (and Russia) as a build-up to the listing of Saudi Aramco.
Most economists and oil industry trackers maintain that this is an artificially high price and cannot be sustained for long.
A government source told BusinessLine: “We believe prices will soften. Besides, the prices at which Indian refiners buy their crude are still manageable. Also, you have to factor in the currency behaviour.”
The average price for 2018 which the Centre and the industry are looking at is in the range of $70-80 a barrel.
Imperfect price market
“This is one commodity that has an imperfect price market. There is lack of predictability in oil prices; therefore we should not be looking at a long-term high-price scenario,” said a senior government official.
“We have lived with $120-110. Yes, there was a bonanza (with low oil prices). From what I have heard, oil prices up to $65 a barrel we will be comfortable with, and up to $80 a barrel we can manage; beyond that, it starts to hurt.”
An oil trader said market talk had it that the US had told big oil producers like Saudi Arabia and Iraq that $80 a barrel is too high a price. “When the US leans, you listen,” the trader said.
Back home, there have been demands for a reduction in excise duty and other State and Central levies that account for almost half the retail price.
Petroleum Minister Dharmendra Pradhan had said recently: “We are concerned about the pinching price.
“A few months back, the government lowered the excise duty. Some of the States have reduced their respective VATs, too.”
On Thursday, Khalid Al-Falih, Saudi Arabia’s Minister of Energy, Industry and Mineral Resources, called Pradhan to discuss continued joint cooperation between the two countries and in particular the current oil market situation. Pradhan expressed his concern about rising prices and its negative impact on consumers and the Indian economy.
While the government is still putting on a brave front, economists believe this is the right time to reduce duties and levies because of the comfortable fiscal situation and the temporary nature of the oil price hike. An inflationary spike has to be avoided because that will hurt the investment cycle, they say.