Falling energy prices could reduce India’s inflation and lower the cost of its import bills, economists say. That could, in turn, help narrow the country’s trade and current account deficits.
According to Radhika Rao, an economist at Singapore’s DBS Group, “a prolonged spell of low oil prices will support discretionary purchasing power.” That refers to the amount of cash a person has available to spend after discounting their tax, debt obligation, and other expenses.
Rao explained to CNBC that domestic oil prices could potentially become cheaper and declining margin pressures on non-oil businesses may translate into some relief for the low demand weighing on the economy.
“If accompanied by an improvement in sentiments and better confidence over income prospects, this would spell good news for growth,” she said. “We are hopeful that an increase in government spending, positive net exports position and base effects could push up (fiscal 2021) growth.”
Rajiv Biswas, Asia Pacific chief economist at IHS Markit, said that “the Indian economy is a major winner from lower world oil prices.” He pointed out that more than 80 percent of India’s total energy consumption in the 2018-2019 financial year was imported.
Biswas said that significantly lower oil and gas costs would also help boost profitability for sectors that make an intensive use of petroleum, including petrochemicals, power generation, and transportation.
He added that softening of inflationary pressure on the economy could also give the Reserve Bank of India more room to cut interest rates further in an attempt to help stimulate growth and improve the flow of money in the country’s financial markets.
India’s Petroleum Minister Dharmendra Pradhan told CNBC last month he would be happy if crude prices were at levels between $50 and $60 a barrel.
Oil resumed declines on Thursday; following Donald Trump’s announcement that the US will restrict travel from Europe for the next 30 days due to the coronavirus pandemic. Brent crude was down six percent to $33.61 a barrel as of 9:27am GMT. US crude benchmark West Texas Intermediate (WTI) dropped 5.6 percent to $31.13 per barrel.