For the last four months, India has enjoyed the surprising benefit of falling crude oil prices. When crude oil prices fall, there is an automatic decline in prices of petrol, diesel, kerosene, LPG gas and a host of hydro-carbon prices. Four months ago, the price of Crude oil was nearly US$ 115 dollars per barrel. Now the price is around US $ 88 per barrel. This steep fall has had some benefits for India.
Indian Government has saved nearly a Lakh crores on oil and fertilizer subsidies due to this fall in the last 4 months. The Current Account Deficit (CAD) has also fallen considerably. The rupee has become stronger. This has led the International Rating agencies to upgrade India’s economy.
There have been complementary policy changes by the government. There has been a perception that the economy is on the upswing and government will help industry and trade grow.
But we have to keep in mind that falling crude oil prices need not be a total blessing. There are potential pitfalls. If the diesel price falls due to over-supply, then it is perhaps alright. But if the diesel price has fallen due to recessionary trends in the USA, Europe and Far East, then those headwinds will affect India. There will be a negative impact on India since we will also lose in the service sector and our exports to Europe and the USA will go down.
Middle -East recession bad for India
The oil exporting countries will face severe economic problems if the price of crude oil does goes down significantly. Nearly 6 million Indians work in the Gulf and the Middle East and their employment is totally dependent of on the prosperity of those countries. The price f oil can g up I Saudi Arabia reduces its production. But the USA and Saudi Arabia want to hold down the price of oil sometime so as hurt the economies of f Russia and Iran. In all issues in the Middle East, the USA and Saudi Arabia work together. They find that Russia and Iran are usually in their opposing camps.
One of the ways to suffocate this opposition is to bring down the price of oil down. Already, Russia and Iran are facing economic trouble since the price of as come down. Both Iran and Russia are dependent on oil export revenues to meet their budgets. Russia and Iran have strong governments which tolerate little dissent. To satisfy their people, they have vast social welfare schemes. If the social welfare expenditure comes down, then they will face trouble at home. Similarly, if their incomes go down, they will be hesitant to enter and dabble in international issues, where the USA and Saudi Arabians have common interests.
So we can expect oil prices to remain down for some time. This is a good time for India to set right its economic ills. This is a short gap available and India must use it carefully. It is not a time for profligacy as in UPA times. It is a time for caution and rectification.
Good luck should not be mistaken for smartness. The Government should consolidate the un-expected windfall gains to the economy.