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Crude Oil hits $100: How will it affect India! February 24 2022Crude Oil

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Crude Oil hits $100: How will it affect India!

As of now, crude oil has gone up to $100 per barrel from February 24th, since 2014, to follow the Russian President’s commands of launching a special military operation in Donbas of Ukraine.

These inflated rates have a great impact on India, as India imports approximately 85% of the crude processed by the domestic refiners.

These high prices can influence an increase in the rates for different industries, make transport expensive, increase the bill amounts from the imports and lead to devastation on current scenario.

The 2021-22 survey of Economy has alerted the risk for imported expenses, from the current worldwide energy prices but the 2022-23 budget and RBI’s Money Policy committee have a very different opinion for the inflated crude oil prices, they thought of getting a barrel for $70 to 75 in the year.

The FOB rates of Indian basket of crude on the 16th of February were around $94.68 per barrel.

Indian basket is a mixture of Dubai and Oman, or sweet grade, and Brent dated or sour grade.

Diesel and Petrol prices have not changed since the Centre had lessened the duty on those fuels

From 3rd November, 2021, moreover, the state government had waived off the VAT when the Crude prices had fallen in December to November levels, and then suddenly became expensive in January.

The FOB rates of Indian Basket for importing crude had fallen to $73.30 per barrel in December from $80.64 in the month of November and the again went up to $84.87 in the month of January.

INFLATIONARY PRESSURES

The higher the price, the expensive the transportation as well as freight. These price inflations have an indirect effect on the prices of vegetables to manufactured goods which is why it puts upward pressure on the price index of consumer.

A higher cost in freight increases several costs for manufacturer too. Different inputs used in a wide range of industries come from crude, thus, they rise too.

Moreover, the cost of preparing power units that use crude substitutes such as naphtha, petroleum, coke, furnace oil as feedstock will be affected too.

As the prices come to rise, and the margins are tweaked, companies continue to pass the inflated inputs to consumers. The increases in price experienced by the makers tend to show in the wholesale rates.

The transport sector is about to see the operating price rise. Airline industry has already experienced 4 fortnightly inflations in the aviation turbine fuel rates in the current year. Railways are also about to experience the operating costs climb on sectors where trains will be tugged by diesel run locomotives.

For the households, LPG rates may inflate. The rates of non-subsidised cylinders as last changed in the month of September in Delhi and the sale price was about rupees 900.

FATTER IMPORT BILL

About 85% of the crude oil is imported to the country is processed. In the first nine months of this fiscal year, the country imported crude worth $85.54 billion, rising 121.1 percent over the same period previous year. Until the end of December, crude oil accounted for just fewer than 20 percent of imports. Volume growth at 156.51 million metric tonnes was small - about 9 percent.

As compared to pre-pandemic year 2019-20, the import bill as 12% higher whereas the volume of imports was about 7% low. For that year, the import value should rise to the levels of 2018-19 when crude oil worth $114 billion came to country.

Indian oil production grew by 163 % in the first nine months of the current financial year as a result of high global oil prices. India exported petroleum products, mainly diesel, worth $46.3 billion in the first nine months.

Oil products account for 15 percent of India's export earnings in April-December 2021.

TRADE IMBALANCE

Rising crude imports have already pushed the trade deficit higher. The commerce ministry estimates the merchandise trade deficit for April-January at $159.87 billion, up from $75.87 billion for the same time period last year and $141.21 billion for the same time period of 2011.

In the current year, crude oil imports averaged $44.82 compared to $60.47 in the year before the pandemic. Import prices have remained above 2019-20 levels almost all of this year.

The trade deficit would widen further if crude prices remain high and imports continue to rise.

After recording a deficit of $9.6 billion in the first half of the current fiscal year, India reported a current account deficit of 0.2 percent of GDP or $3 billion.

In a commentary on trade data, chief economist Aditi Nayar of rating agency ICRA wrote that the current account deficit was forecast to widen to $26-29 billion in October-December 2021, before easing to $15-17 billion in January-March 2022.

FISCAL DEFICIT WORRIES

In the current year, as well as in the year to come, higher crude oil prices could negatively impact the deficit of the Centre, especially if the finance ministry lowers the excise duty on petrol and diesel to soften the blow for consumers.

The government could also be impacted if it subsidises cooking fuels once again for poor households. Subsidies on LPG cylinders have not been available since May 2020.

State governments may be required to drop the value-added tax on the two fuels if the federal government reduces excise duty. Any reduction in duties by the federal government or states could result in lower tax revenues.

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