Don’t fall for the cheap oil slick; tank up on a medium-term plan

Oil’s not well. The steady drop in global crude oil prices points to weak demand conditions that will dampen prices right across the board. This, in turn, may stymie growth prospects going forward. Analysts expect crude prices to fall to as low as $20 per barrel. The latest available price quote for Indian basket crude is $33 per barrel. The government needs to chalk out a medium-term plan to tackle the scenario of sticky oil prices and its macroeconomic fallout of declining nominal GDP growth and output.

The Centre has, rightly, hiked taxes and duties on oil products even as retail prices have softened. The move has led to buoyant indirect tax collections this fiscal. The lower prices of petro-goods like diesel and petrol have meant an additional boost to consumption expenditure. The Mid-Year Review estimates the additional boost the economy has received is 1-1.5% percentage points of GDP. Looking ahead, the upside on this score is likely to be limited even with continued softness in oil prices. Private consumption, after all, can shore up the economic momentum only so much and no further. Also, weaker oil and commodity prices would mean lower realisations, margins and prices across the economy. Besides, much easier oil prices would affect revenues of oil producers and likely put further pressure on our export growth. The review, though, seems more sanguine on exports. Sure, in statistical terms, exports may start to look up after declining for an entire year. But a weak global economy is unlikely to rev up export demand soon.

Private corporate investment in India also appears to be falling (as a percentage of GDP). The way forward is to step up government investment, and proactively rationalise and phase out continuing oil subsidies on products like kerosene and cooking gas. The exchequer would save almost Rs 50,000 crore annually. Now that the biometric Aadhaar card rollout seems to have countrywide coverage, we need to opt for direct benefit transfers for the poor on account of LPG cylinders. Solar lanterns must substitute sooty kerosene.