Rising crude oil prices may hit India’s economic growth: Economist

With Brent crude oil prices rising above USD 100 a barrel again amid renewed geopolitical tensions, India’s economic growth could face pressure in the coming quarter, as higher oil prices raise inflation, import costs and risks to the current account, economist Sunil Sinha said.

Impact on GDP and Inflation

Sinha, former Senior Economist at National Council of Applied Economic Research (NCAER), said every USD 10 increase in international crude prices could shave around 20-30 basis points from India’s GDP growth. “If oil prices go up by USD 10, then the impact of that increase on GDP would be around, say, 20 basis points to 30 basis points,” Sinha said in an exclusive conversation with ANI. This means that with India’s latest quarterly GDP growth at 7.8 per cent, a USD 10 rise in crude could potentially bring the growth rate down, he said. However, Sinha stressed that this estimate represents only the first-round impact, and the overall effect could be stronger once second-round effects are taken into account.

Sinha said the impact of higher crude prices would also be visible in inflation. According to him, every USD 10 increase in oil prices could push India’s retail inflation, or CPI, higher by around 50-60 basis points, if the increase is passed on to the domestic market. For example, if inflation is at 5.5 per cent, a USD 10 rise in crude could take it to around 6.1 per cent, he said. He said, “If the price of oil increases by USD 10, then its direct impact on India’s inflation, particularly, say, for retail inflation, CPI inflation, which impacts all of us, directly is about 50 to 60 basis points, which simply means that if inflation is 5.5 per cent, then because of the oil price increase, if the oil price increase is passed into the domestic market, then it can actually push inflation by 50 to 60 basis points”.

Wider Economic Risks

The impact on wholesale inflation could be even higher, with Sinha estimating a 60-80 basis point increase in WPI inflation because of the higher weight of oil in the wholesale price index. Higher crude prices could also increase India’s oil import bill even if the country imports the same or slightly lower volumes, Sinha said. This could widen the merchandise trade deficit and put pressure on the current account deficit. India’s current account deficit stood at around 0.5 per cent of GDP in the first quarter, which Sinha described as fairly comfortable from a historical perspective. However, he warned that if oil prices remain elevated, the deficit could increase further.

Sinha said the key factor for the Indian economy will be where crude prices settle on average during the financial year. If India’s average crude import price remains around USD 75-80 a barrel, he expects limited impact on the country’s current GDP growth trajectory. He said, “Well, you know, obviously different analysts will take different prices as their base case. But suppose it remains close to about 70 dollars a barrel, then in that case certainly the current growth momentum will run”.

Jobless Growth a Structural Concern

Sinha also flagged a structural concern with India’s strong 7.8 per cent GDP growth. While he called the growth number “very good” and noted that it makes India the fastest-growing large economy, he said the growth has not translated sufficiently into job creation. He said on GDP numbers, “The number itself is very good. But we have seen that the growth post-COVID recovery period has been pretty good. So far as numbers are concerned, but they are simply not translating into the job creation. So in other words, this whole growth to a large extent is turning out to be jobless growth. So if you do not have, or if you are not able to create more meaningful jobs in the economy, then you will not be adding more new consumers into the economy”. (ANI)

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