Rising Oil Price and Weakening Rupee

Since coming to power the Narendra Modi government, in the economy sector, was helped by one big factor i.e., the low international crude oil price. Helped because crude oil import represents top import bill for the Indian government. Being the only major source of conventional energy, without which the economy cannot work, oil is the most crucial product for India. As India produces very little of its oil, it is mainly reliant on crude imports from the Middle East. And the Middle East is again facing Gulf war type of prospects after the US President Donald Trump pulled out of the Iran nuclear treaty.

Instead of passing the benefit of this low international crude oil price, the Modi government pocketed all the profit in the form of higher excise duty on petrol and diesel. Thus the Indian consumer was deprived of low petrol and diesel prices. The excuse for this policy was to use this siphoned-off money for so-called “welfare” activities. Now with rising oil price, petrol and diesel prices have hit their highest levels in India. Despite this, the government is in no mood of reducing and repealing the excise duty on these products.

It now seems that the big benefit of low international crude price that the Modi government enjoyed is going to turn into big cost. The price of crude oil in international market is steadily rising since last year or so. It has hit its highest of recent years of about US$ 71 per barrel. This is going to put immense pressure on the already strained fiscal deficit of the Indian government. The Modi government cannot afford to let lose its purse anymore, which it very much wants to lose to win elections, because that will result into credit rating agencies  downgrading the rating of Indian government bonds, which is already of lower medium grade. If that happens then it will stall investment in the Indian market by foreign and local investors. This will dampen the future growth prospect bringing further downgrades. If the oil price continues to rise and the Indian government doesn’t tighten its purse then a repeat of 1990s crisis also cannot be ruled out.

Not only the rising price of crude oil can give immense headache to Modi government, but also tumbling rupee. Rupee has hit its lowest level in last couple of years of 68.52 rupees against 1 US$. Depreciating rupee will also cause import bill to soar. It will also lift the inflation level making life of ordinary Indians even more difficult than what it is right now. In the aftermath of US Fed’s policy of raising its interest rates, the Dollar is strengthening. This strong dollar can cause immense problems in the so-called emerging market economies which includes India.

This double whammy of rising crude oil price and weakening rupee is soon going to confront Modi and his government. It has to be seen how he tackles it. Looking at the past evidence of Modi government’s handling of the economy, we should not expect much.