The free fall in the price of crude oil has had a dramatic impact on the economies and stock markets of numerous countries worldwide. For countries such as Canada, Saudi Arabia, and Russia, which rely heavily on producing oil to keep the economy running smoothly, the significantly lower price of crude oil over the last year has caused serious problems. However, some countries are benefitting from lower oil prices. Money Bhaskar has reported that India in particular has seen mostly positive effects from oil being between 2,600 INR and 3,300 INR a barrel. So, how are these economic updates in India helping the country benefit from the low price of this commodity? How can the Indian economy make the most of the opportunity, and what will happen when crude is back over 6,000 rupee a barrel?
Lowering the Trade Deficit and Lower Subsidies
The BBC reports than India imports 75% of the oil that it needs, and with the low price of oil India’s trade deficit is being greatly reduced. Theoretically, if India increases exports and crude prices fall even further there could be a trade surplus in India. India’s fuel subsidies are also affected by low oil prices. Subsidies could drop significantly as long as oil prices do not recover soon.
Falling Oil Prices Will Ease Inflation
Reuters reports that falling international oil prices will help calm inflation. However, it is expected that this will not be as important as lowering the trade deficit because consumption of oil in India’s manufacturing sectors is not as high as other nations, save for producing products like carbon black. Still, oil prices do have an underlying effect on the economy as a whole. When oil prices rise, so do transport costs. For every 660 INR drop in the price of a barrel of crude, there is a corresponding 0.2% fall in inflation according to Kotak Securities and a report from Moneycontrol.
As the trade deficit lowers, the Indian government is not forced to buy dollars to pay off its debts. This means the value of the Indian Rupee goes up, too. The current strength of the Rupee against the United States Dollar can partly be contributed to falling oil prices, but other factors such as foreign investment limits on Indian government bonds, and no rate hike by the U.S. Federal Reserve have also been factors. Bloomberg suggest that a rate hike by the U.S. Fed will affect the meteoric rise the Rupee has seen recently. It will likely cause a slowdown.
While India is one of the countries to benefit the most from the falling price of oil, it is not all sunshine and roses. There are some downsides to crude being so low, and with futures continuing to slide it is important not to forget about the potential negative impacts. Indian foreign workers do not just count on the strength on the Indian economy to take care of their families. They also care about the economic strength of the country they are working in. According to Seeking Alpha, 7 million Indian work in the Middle East, and as the economies of oil-producing Middle East countries fall, so do the wages of Indian workers in the region.