The Implications of declining oil prices on Indian Economy.


The implications of declining oil prices on the Indian Economy.

 The crude oil prices have decreased in recent days, the reason being the trade war between the US and China. The tension in the market has lowered the demand for crude oil and therefore also lowered the price. Also, US shale oil supply is on a constant rise and everyone had underestimated how much oil can the US economy extract. The rise in production of shale oil has threatened the OPEC organizations and therefore leading to a mixed response in the market. The price of crude oil dropped by 2.75% on 29th May 2019. The following are the effects of declining oil prices on the Indian Economy:

  1. Current Account Balance: The current account balance is the difference between what a country is spending on its imports and its exports. Constituents of current account include the balance of trade, net primary income, and net cash transfers. If the cost of the imports is more than the exports income, then there is a current account deficit. In the case of a reverse situation, there is a current account surplus. Since India's dependency on oil is increasing as years are passing by and more oil is being imported in the country, a decline in the price of crude oil would actually benefit the country because of the resulting surplus in the current account.
  2. Inflation Rate: Since most of the industries are dependent on crude oil, the reduction in oil prices could lower the prices of products in the country. The automobile industry, oil companies, the aviation industry, the tire industry, and the paint industry are the most dependent industries on crude oil. Lowering of oil prices would lower these industries cost and thereby increase the profits of these companies. So, if this benefit is passed on to customers, then even the common man is benefitted.
  3. Fiscal Deficit: A fiscal deficit occurs when the government's expenditure exceeds its revenues. Since India imports more than 1.5billion barrels of crude oil each year (86% of total requirement in the country), even a slight decrease in crude oil price helps to lower the government expenditure by a significant amount. A rise in fiscal deficit impacts the country and its markets very negatively as the government has to borrow the deficit amount which increases its interest cost. A lower expenditure means a better fiscal deficit position.
  4. Value of Rupee: An exchange refers to the ratio at which one currency can be exchanged for another currency. Currently, the rupee-dollar exchange value is Rs.69.83 for every $1. A lower ratio denotes a stronger currency and vice versa. The currency exchange value is affected by various factors and the crude oil price is one of the factors. When the crude oil prices increase, the value of rupee is depreciated and when the crude oil price decreases, there is an appreciation in the value of the rupee. Therefore, declining oil prices will improve the rupee-dollar exchange rate.
  5. Stock Market Situation: As we have seen that many industries get impacted by the crude oil price situation. A decrease in price is clearly good for companies in those industries. A lower cost means higher profits and therefore better financial standing for these companies. The BSE Sensex and NSE Nifty both go in bull mode when the crude oil prices decline. The market capitalization of the dependent companies also increases. In nutshell, the stock market witnesses an upward trend which is a good sign for investors. 
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