Oil price surge – impact on the Indian macro-economy

June 22, 2011 5:55 am

“The impact of oil price increase on the Indian macro economy is huge. Every US$10, a barrel increase in full-year average crude oil prices results in an increase in current account deficit by around 0.4 per cent of GDP”, opines Saravana Kumar, chief investment officer at Tata AIG Life
 
The last six months have witnessed a sharp spike in the crude oil prices as the Brent crude breached US$120, rising over 45 per cent during the period. The recent surge in crude prices has been driven by supply disruptions in North Africa as well as the ongoing global recovery led by the emerging markets. Even as the world oil demand has grown in the last 20 years at around 1 per cent per annum, the oil demand in China and India has clocked on an average around 6 per cent and 5 per cent per annum growth respectively. India is the fourth largest consumer of oil accounting for around 4 per cent of the world consumption.
 
As the demand for oil keeps growing in line with the global growth, the long term moderation in oil prices could be due to the fact that global GDP is increasingly becoming less energy intensive (measured by primary oil consumption per unit of GDP). Each US$ 1,000 of global GDP requires just a third of oil equivalent of energy now as compared to the same amount of GDP output 30 years ago. The reduction in energy intensity over the last three decades is due to energy efficiency gains in manufacturing and the rising share of services sector in the global GDP.Unlike the sharp falls in oil intensity seen in many developed economies and large emerging markets like China and Brazil, India has managed to register a modest decline in oil intensity. As a result, higher oil prices will have a larger impact on India’s GDP growth trajectory.
 
India imports about 85 per cent of its crude oil and petroleum products requirement, the net oil imports making up around 20 per cent of the import bill. This predominance of oil in Indian import basket is more than those of the ASEAN countries, all of whom, unlike India, have a positive current account and can absorb the oil price spike better.

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