As the world grapples with the ongoing challenge of rising inflation, a new economic obstacle looms on the horizon – the soaring global prices of crude oil.
In the year 2023, we have witnessed a rapid and substantial surge in crude oil rates, with the Brent Crude benchmark alone experiencing an impressive surge of nearly 19 per cent. Concurrently, the West Texas Intermediate (WTI) crude, another crucial benchmark, has mirrored this upward trajectory.
It's important to highlight that oil prices have been on an upward trajectory for four consecutive sessions as of Tuesday. This surge is attributed to concerns arising from weak shale output in the United States, sparking worries of a supply deficit. Major oil-producing nations have already committed to extending production cuts, further intensifying these concerns.
The escalating global crude oil prices carry significant implications for the world economy, particularly for India, which stands as the third-largest oil consumer and importer globally.
What compounds India's vulnerability is its heavy dependence on imports, covering approximately 85 per cent of its crude oil requirements. Experts are now forecasting that crude oil prices may ascend to $105 per barrel by the end of this year, marking a substantial increase from the current level, which hovers around $93.
Despite the global surge in crude oil prices this year, India initially did not bear the brunt of these increases. This was primarily due to the significant discounts it enjoyed on imports from Russia. However, as this option fades away, India now faces the challenge of digging deeper into its coffers to finance its crude oil imports.
This situation could not have arisen at a more inconvenient time for India, which is already grappling with elevated inflation levels.
The surge in global crude oil prices is expected to trigger a corresponding increase in petrol and diesel prices within the country. This price escalation could have a severe impact on a large segment of the population, particularly those belonging to lower-income brackets.
A similar trend was witnessed a few years ago when India's petrol and diesel prices soared to record levels, surpassing the Rs 100 per litre mark.
If global crude oil prices continue to surge, it's highly likely that domestic fuel prices will rise as well unless the government intervenes by implementing measures like reducing taxes on fuel.
While there may be no immediate plans to lower petrol and diesel prices, it wouldn't come as a surprise if the government considered providing some relief, especially in anticipation of the Lok Sabha elections scheduled for 2024.
High fuel prices can set off a domino effect across the Indian economy, with the most immediate impact being felt by personal vehicle owners. They would be compelled to stretch their monthly budgets to accommodate the rising fuel costs, forcing many to contemplate reductions in their fuel consumption.
Furthermore, India's automotive sector, a major employment generator in the country, could witness a decline in vehicle sales as fuel prices continue to surge. This decline in demand could send shockwaves throughout the industry and the extensive network of micro, small, and medium-sized enterprises (MSMEs) linked to it.
However, the repercussions of rising fuel prices extend beyond vehicle owners. Individuals relying on public transport would bear the brunt of this situation as operational costs drive fare hikes.
Additionally, logistics and transportation companies are faced with the necessity to pass on their heightened fuel expenses to consumers, resulting in elevated delivery costs for a wide range of products – spanning from basic food items to more high-value commodities.
This upward trajectory in oil prices poses substantial risks to India's economic growth, especially as the country gears up for the demand-intensive festive season. Traditionally characterized by high consumer spending, this period could experience a dampened sentiment if oil marketing companies decide to increase petrol and diesel prices.
Moreover, the surge in oil prices could potentially widen India's current account deficit (CAD), which measures the disparity between the value of goods and services a nation exports and imports.
Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, recently noted that every $10 rise in Brent crude prices widens India's CAD by 0.5 per cent, resulting in rupee depreciation and imported inflation.
Lastly, the stock market may witness tremors as oil marketing companies contemplate revisions in petrol and diesel prices. Such considerations could potentially influence the stock prices of these companies and cast shadows over the broader stock market.
