Oil Prices Have Surged Since Qassem Soleimani’s Death
Here are three main effects of higher oil prices after assassination of Iranian General Qassem Soleimani
Photo Credit : Reuters
Oil prices surged more than 4% after a US air strike that killed Qassem Soleimani, Iran’s paramilitary leader in Baghdad.
The attack raised fears of further instability in the region, home of 25% of the world’s oil supply, as Iran promised fierce retaliation, which may manifest in attacks on oil fields owned by Saudi Arabia (as had happened in September 2019) or in disruption of oil transport in the Strait of Hormuz, where Iran has had a history of seizing tankers.
How This Could Affect the Indian Economy
As a developing country, India has a very high dependence towards oil imports. India imports about 80% of its oil needs, mainly from the Middle East. Thus, any instability in the region can have a negative impact on oil prices and domestic GDP growth.
Here are three main effects of higher oil prices:
Larger current account, fiscal and trade deficit in India. Higher oil prices put a strain on India's finances, which are already strained as the government plans to enact more fiscal measures (through tax breaks and increased government spending) to counteract slowing GDP growth. An increase of oil prices of US $1 translates to an additional import bill of Rs 10,700 crore annually.
Further depreciation of the rupee. Oil imports are paid in dollars. Thus, higher oil prices can reduce foreign currency reserve and potentially lead to the depreciation of the rupee.
Economic slowdown. Many sectors of the Indian economy are highly sensitive to the price of fuel, therefore the Indian stock market might decline as a result. Yes - it might be true that the government may choose to absorb some of this price increase (by increasing fuel subsidies and therefore increasing budget deficit even further), sparing consumers the pain. Nonetheless, higher fuel prices will lead to higher prices for daily commodities and can increase the rate of inflation. This can lead to a reduction in discretionary spending that further exacerbate economic slowdown. Overall, this can weigh down the stock market, and sectors that will be hit the hardest are likely sectors that are related to transportation, automotive, oil derivatives (companies that produce plastics, tires, chemicals), and oil marketing companies (OMCs).
It is expected that every US $10 increase in crude oil prices increases India’s inflation by 0.1% and reduces GDP growth by 0.3%.
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