Oil is one of the most important pillars of the global economy. Any significant change in the crude oil prices sends ripples through the world economies. The price of oil has effect on everything from stock markets, manufacturing industry, transport, government revenue as well as developmental work.

Rising Fuel Prices’ Effect on Indian Economy

All businesses are affected by oil prices one way or other. Higher crude oil prices and its derivatives adversely affects margins of businesses across sectors such as refining, airline, paints, tyres, footwear, lubricants, cement, logistics, construction materials and chemicals for whom crude or its derivatives are major input costs. Higher crude oil prices will either erode companies profitability or force them to increase prices which would add to inflation.

Increased fuel prices will also impact on transportation costs of people and goods. Lower earnings or slower growth may bring stock prices of these companies lower affecting the overall economy of the country.

The growing economy keeps pushing up the demand for crude oil resulting in higher import of crude oil. Higher imports mean countries like India has to buy more foreign currencies to meet its import demands, since crude oil is traded in US Dollars. This may also result in widening of current account deficit that is measures the flow of goods, services and investments into and out of the country. The widening deficit will result in weakening of Indian currency Rupee. Higher oil prices will push the import bill higher; however, it may be partly offset by higher oil exports and better remittances.

Rising crude prices may also affect developmental expenditure in countries like India. Petrol and Diesel account for a large part of revenue for the government which it spends on developmental projects. Rising fuel prices will force the government to reduce the taxes of fuel which will shrink the revenue affecting the developmental projects in the country.

In 2018, India’s net trade oil deficit has widened considerably, owing to a combination of high oil prices and a weak currency due to the reasons as explained above. Steadily rising domestic per capita consumption has made India one of the largest oil importers of the world. This keeps Indian economy exposed to the movements of global oil prices. To make India’s economy more resilient to changing global oil prices, India needs to lower its oil imports and also increase its exports to offset widening trade deficit.

The Economic Survey 2018 states that every $10 per barrel increase in the price of oil will reduce the GDP growth by 0.2% to 0.3% points. The survey has also stated that India’s economic growth is expected to grow between 7% and 7.5% in the fiscal year 2019. But this growth may be hampered because of the rising prices of oil.

Higher oil prices affect India’s economy and inflation targets, and are now posing one of the toughest tests yet for the government that is gearing up for elections amid the highest fuel prices in the country in years.