New Delhi:As the government continues to avoid using the term “slowdown” to describe weakening growth in the Indian economy, the prospect of an increase of anywhere between Rs 5-6 in pump prices of fuel as early as next fortnight may be the worst possible news.
The multiple drone strikes on Saudi Arabia’s Aramco over the weekend have impacted global oil supplies from that country and turned global oil prices volatile. Remember, benign prices of oil have been a significant factor in containing the spread of a deep slowdown across various sectors of the Indian economy for months now.
But as the global oil market was pounded with 10 drones attacking two critical pieces of Saudi crude oil infrastructure, disrupting production of almost 5% of the world supply of oil, shock waves from this event will likely be felt on the Indian economy soon. India imports more than 80% of the oil it consumes and any event which could derail benign oil prices could also simultaneously hurt the Indian economy.
Analysts at Kotak Institutional Equities said in a note that the spike in global crude prices, even though temporary, will be negative for downstream oil marketing companies and that they did not rule out the possibility of moderation in marketing margins on auto fuels. “A $10/bbl rise in global crude and product prices may require OMCs to increase retail price of diesel and gasoline by Rs 5-6/liter in the following fortnight. Sharp jump in global crude prices may also put pressure on refining margins amid slowing demand, besides increasing absolute quantum of fuel and loss,” the note said.
If pump prices go up by Rs 5-6, as these analysts suggest, that will be a significant increase indeed.
Madan Sabnavis and Urvisha H Jagasheth of CARE Ratings said in a note that any sustained increase in oil prices is always going to be a cause of concern for India, considering we import more than 80% of our oil requirements.
“In the current financial year, India has imported 4.5 mb/d (April-July) of crude oil and our import dependency based on consumption has increased to 84.9%. Impact is to be felt in terms of trade deficit, on the markets, Indian basket of crude oil prices and exchange rate. We assume at the macro level with imports of 1643 million barrels of crude oil in FY20 a dollar increase in prices on a permanent basis would increase the bill by roughly USD 1.6 billion per annum,” the note said.