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Informist, Tuesday, Sep 24, 2024

 

MUMBAI – Should the government choose to pass on the relatively lower crude oil prices to consumers, it can help contain India's inflation, Bank of America said in a research report.

 

Stating ways a lower oil price can affect India's economy at large, the bank said that the government can choose to either pass on lower oil prices to consumers, thus helping in reducing inflation, or absorb such gains to reduce the fiscal deficit. 

 

With petrol and diesel carrying a 2.19% and 0.15% weightage, respectively, in the Consumer Price Index, a 5-rupee-per-litre reduction in the retail cost of these fuels combined would reduce the fuel index by about 5.5%, leading to a fall of around 14 basis points in the headline inflation directly, the report said. Another 14-15 bps of an indirect fall in headline inflation would be seen over a period of 2–4 months, totalling about a 29 bps impact on inflation, it said.

 

"While this is not a very large decline in headline inflation, it could generate an outsized impact on inflation expectations, which are influenced more by prices of essential food and energy prices," Bank of America said.

 

Since the latest downward revision in domestic petrol and diesel prices by the government in April, crude oil prices have fallen by about 20%, in terms of the rupee. With the 59% cost of the retail fuel comprising crude price, and the rest as taxes and other commissions, a fall in oil price results in gains for Indian oil marketing companies, the report said.

 

"By our estimate, since the last price revision, crude oil prices in rupee terms have declined by just under 9 rupees a litre between March and September," the foreign bank said. "This means that barring any adjustment, the government can look at a gain of almost 110 bln rupees in profits annually for the additional money domestic oil companies make on petroleum products, thus making the gains potentially be close to 1 trln rupees on an annualised basis, or 0.3% of GDP, if these numbers hold for another year or so."

 

Apart from a direct effet on inflation, lower crude oil prices could also lower India's current account deficit, as the nation imports over 80% of crude, the report said. In 2023-24 (Apr-Mar), India imported crude oil worth $132.84 bln, down 16% on year, with volume remaining largely unchanged.

 

"From its peak of $92 a barrel in April, Brent crude oil prices have fallen over 20%...the fall in crude oil prices will help India save almost $13 bln for every $10 bbl decline annually," the foreign bank said in its report. "This translates into around 0.3% of GDP on the current account."

 

The foreign bank said, even if the government chooses to use the additional resources to reduce the fiscal deficit, and not pass it on to consumers, it would eventually lead to lower inflation, albeit over a longer period. Assuming public sector oil marketing companies pass on their gains as dividends to the government, it would eventually accelerate fiscal consolidation, which, in turn, would reduce inflation over the medium term.  End

 

Reported by Sourabh Kumar

Edited by Deepshikha Bhardwaj

 

 

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