Experts say low crude prices have helped India in a couple of areas. For one, according to Milan Vaishnav of the Carnegie Endowment for International Peace, they’ve reduced India’s fuel subsidy bill. This, in turn, has helped lower the current account deficit (CAD). A high CAD typically means value of investments made by a country and its imports is higher than exports.

“Rising oil prices should be a concern for India, particularly because lower oil prices have acted as a salve for the economy in many respects,” added Vaishnav.

Here is India’s CAD for the last few quarters:


Higher oil prices mean, besides food inflation, an increase in prices of basic services like electricity.

“Higher oil prices will affect the Indian consumer price basket directly through higher transport costs, and could also indirectly push food prices higher. The energy needed to transport food from farm to market is a major component of its final cost to consumers,” explained Bill Adams, senior international economist at Pittsburgh-based PNC Financial Services.

As of April, retail inflation in India stood at 5.4%, while the wholesale price index (WPI) suddenly rose by 0.34% after being in the negative for 17 months.

The inflation trajectory is important for Reserve Bank of India (RBI) governor Raghuram Rajan who is keenly watching it, along with the monsoon, to decide the central bank’s monetary policy stance. Any upward movement in inflation will force Rajan to do away with interest rate cuts, and consider hiking them instead.

“The decline also helped get inflation under control; a return to higher prices could force the RBI to press pause on further interest rate cuts, which the government has been counting on to give a fillip to growth,” Vaishnav said.

Rajiv Biswas, Asia-Pacific chief economist at consultancy IHS Global, agrees.

“The rise in oil prices could contribute to somewhat higher WPI inflation in coming months, and eventually could also push the retail inflation higher, reducing the headroom for further monetary policy easing,” said Biswas.

Trade woes

Low oil prices have also had a significant impact on India’s trade deficit.

In April, India’s trade deficit—the amount by which the country’s imports exceeded exports—stood at $4.8 billion, almost 50% lower (pdf) than the $10.9 billion a year ago. Much of this huge drop was due to falling oil prices.

With rising oil prices, the deficit could widen, which will have a trickle-down effect on the overall economy. A higher deficit impacts the exchange rate and reduces forex reserves.

“Being a net importer on an annual basis, any increase in crude oil price will lead to some pressure on the trade balance as the corresponding increase in exports revenue on account of refinery products would be lower,” said Madan Sabnavis, chief economist at CARE Ratings, a credit ratings agency.

Glimmer of hope

There’s one upside, though: higher oil prices could boost India’s flailing exports. This is because the country imports crude oil, refines it, and ships out the finished products.

Exports fell for the 17th straight month in April on the back of a global slowdown. Moreover, low oil prices have shrunk the value of India’s petroleum exports, which form a little over 18% of the country’s total export of goods.

In December, the government explained the reasons for this dismal drop in exports. “Petroleum product exports have fallen by 52%. In the case of petroleum products, there has been steep decline in raw material prices, namely, crude oil,” a statement from the ministry of commerce and industry said.

So, with oil prices inching up, exports could go up, albeit marginally.

“A quarter of India’s exports go to OPEC and the resource-dependent ASEAN economies. So, higher oil prices could boost demand for Indian manufactured exports,” PNC’s Adams explained. “But the drag on domestic demand will probably outweigh the boost to the export sector.”

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