What is the impact of crude price fall on India’s economy?

The crude price fall that started during early 2014 is one of the most important global economic events that produced significant effects on Indian economy in recent years. India is the second largest crude oil importer at present and a major consumer. India imports 80 of its crude oil needed domestic consumption.

           Table: India’s import of crude oil

Year

Import (MMT) volume

Average crude price ($)

Total crude import bill (US $ Billion)

Crude imports as a percentage of total imports

2010-11

164

85

140

38

2011-12

172

112

155

31

2012-13

185

108

164

32.6

2013-14

189

106

165

35.4

2014-15

190

84

113

24.5

2015-16

202.1

46

83.1

21

Source: Indian Petroleum and Natural Gas Statistics 2014-15, Ministry of Petroleum & Natural Gas Economics and Statistics Division New Delhi. Data for 2016 is from Directorate General of Commercial Intelligence and Statistics. Column 2, 3 and 4 figures are rounded.

           Crude imports constituted to nearly 35% of total imports bill till 2013-14. Around $150 billion were needed to meet crude imports. But after the average crude price fallen below $50, crude import bill has fallen by half to $83 bn for 2015-16. Crude imports were around 35% of the total imports and now it has fallen to just 21% of the total import bill. At the same time, consumption increased beyond 200 MMTs. Following are the most important impacts of the low-priced crude on Indian economy.

1. Crude import bill halved: Import bill halved from $165 bn in 2013-14 to $ 83 bn in 2015-16. If we aggregate all machinery items, the imports bill for machinery becomes larger than the crude import bill. The fall in crude import bill was because of falling international price – from $108/barrel in 2012-14 to $46 during 2015-16.

2. The reduced import bill has enabled the country to save precious foreign exchange.

3. Crude price fall reduces both trade deficit and current account deficit

4. Declining crude prices will soften imported inflation. Higher crude prices, on the other hand, would have created inflationary pressure as crude is a necessary item for India. 

5. Indirect effects: Crude price fall led to several indirect effects. A fall in income in the Middle East has reduced India’s exports. During 2015-16, exports have dwindled to $266 compared to $316 in the previous year. Another indirect effect is that remittances to India has fallen to $63 billion from $66 bn in the previous year. fall in remittance is happening for the first time in the last eight years.

           The crude price impact on India is mixed though the fall in import bill is the most important one. India has benefited on the trade front as the import bill has fallen. But there is the adverse effect of reduced remittances from the Middle East. The crude import in terms of value, fallen by $90 if we accommodate the higher consumption in the last year (earlier crude import bill was $165 bn and now it is just $83 bn). Traditionally, imports were in the range of 170 to 190 MMTs. But during 2015-16, imports crossed 200MMTs. This indicates that despite increased import volume, crude bill has halved and this is the trade/welfare gains from low crude price in the international market.

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