Oil price uptrend to hit India hard, say economists

The supply-driven increase in crude oil prices is likely to spur a major differentiation in emerging markets’ performance, hurting large net oil importers with weak economic fundamentals possibly by more than it benefits large net oil exporters, the brokerage said.

Turkey and Ukraine, with high inflation and large deficits, appear to be the most at risk of a vicious spiral from a continued rise in oil prices, while India, Cambodia, Pakistan, the Philippines, Sri Lanka and Romania are also susceptible, albeit to a lesser extent, it said, as reported by The Hindu.

The clear winners from the rise in oil prices include exporters Saudi Arabia, Nigeria and Colombia.

For India, the rising oil prices risk reversing the improving economic fundamental ‘sweet spot’ experienced during 2014-16, at a time when there are heightened market concerns over pre-election populist government policies, the costs of cleaning up the banking sector and the lack of progress in rejuvenating private investment, Nomura said.

“We estimate every $10/barrel (bbl) rise in oil price would worsen the current account balance by 0.4% of GDP, increase inflation by 30-40 basis points (bps), hurt growth by 15 bps and worsen the fiscal balance by 0.1% of GDP. For instance, if Brent oil averages $75/bbl sustainably in 2018, we estimate the current account deficit would widen to 2.5% of GDP in 2018 from 1.5% in 2017,” said the brokerage.

Additionally, rising inflationary risks would push the Reserve Bank of India to hike interest rates cumulatively by 50 bps in H2 2018 against the current base case of no change. “In fact, the economic effect could exceed our estimates, as the government could decide against raising petroleum product prices in the year,” Nomura said.

Other economists too echoed these fears. “Higher global crude oil prices are net negative for the Indian economy in almost all aspects,” said Kaushik Das, chief economist at Deutsche Bank AG in Mumbai, according to Mint. He estimates that Brent crude at $75 a barrel could lower his growth estimate for India to about 7.3 per cent from 7.5 per cent for the year through March 2019.

The Reserve Bank of India estimates that oil at $78 a barrel would shave off 10 basis points from its 7.4 per cent forecast for gross domestic product. Moreover, it expects costly crude could stoke inflation by 30 basis points, underpinning expectations that monetary policy will turn more hawkish.

“At the current juncture, we believe that headline inflation will peak at 6.2 per cent in the third quarter of this year,” said Hugo Erken, senior economist at Rabobank International. “The pretty hawkish RBI minutes released last week give credibility to our previous stance that inflationary pressure will rise faster than expected, which will force it to hike faster than expected.”

The RBI aims to keep inflation around 4 per cent. Pressure to tighten could also increase if the rupee - already Asia’s worst performer this year - sinks further and pushes up India’s oil import bill, as India imports more than two-thirds of its oil requirements.