Indian economy squeezed again as oil rises above $80 a barrel

State-owned oil PSUs hiked petrol prices by 17 paise a litre and that of diesel by 21 paise per litre, taking petrol price in Mumbai to Rs82.65 a litre on Monday, while diesel prices reached Rs70.43.

In Delhi, petrol price touched Rs74.80 a litre, while diesel prices stood at Rs66.14. In other major cities, petrol prices increased by about 0.2 percent while diesel prices rose by 0.3 per cent.

The Indian economy, which has gained a lot from low oil prices in the recent past, is once again under pressure of soaring crude oil prices, which is currently ruling above $80 a barrel.

The oil price spike, the first since November 2014, has brought fresh challenges to government’s planning machinery, as it is bound to affect inflation, current account, fiscal position and growth, all of which call for tighter macroeconomic policies.

And, as oil rose above the $80 a barrel mark, the leading stock market indices slumped towards the close of the trading session on Thursday. 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 main trigger for the oil price rise is the geopolitical and geoeconomic risks, political upheaval in West Asia, and aggressive decisions on output by Saudi Arabia (and Russia) ahead of the listing of Saudi Aramco.

The recent price spike, however, is artificially high and cannot be sustained for long under the current scenario, according to economists.

While the prices at which Indian refiners buy their crude are still manageable, falling rupee has to be factored in to get the actual effects of the oil spike.

While the government and the industry are looking at an average price of $70-80 per barrel for 2018, prices could actually come under pressure if stocks build up, say analysts.

While the US shale oil production had put pressure on Opec oil earlier, the changing trade scenario where the US is fighting on all fronts to contain its huge trade deficit could alter the equation for crude buyers.

While for India, which saw the low oil price as a bonanza, oil prices up to $65 a barrel is a comfortable level, and up to $80 a barrel is manageable, beyond that, it starts hurting.

Petroleum minister Dharmendra Pradhan had recently said the government is concerned about the pinching price, it has done precious little to cool retail prices of petro fuels.

Neither the centre or state governments are willing to slash excise duty and other levies that account for almost half the retail price of petrol and diesel.

On Thursday, Saudi Arabia’s minister of energy, industry and mineral resources, Khalid Al-Falih, called petroleum minister Dharmendra Pradhan to discuss continued joint cooperation between the two countries and in particular the current oil market situation.

Pradhan, however, is reported to have expressed concern about rising prices and its negative impact on consumers and the Indian economy.