Declining Oil Prices Provide Relief for Consumers and Government
NEW DELHI: Brent crude oil prices fell below $80 a barrel for the first time in three months on Tuesday. This decline is expected to help oil companies maintain current pump prices, support government finances, and prevent inflation from rising, provided that crude prices remain low. Market sentiment has improved, with oil marketing company stocks rallying over the past two days amid the drop in global prices.
Policymakers are cautious in their projections, especially with ongoing peace talks between the US and Iran. DK Joshi, chief economist at Crisil, noted that while the recent price drop is a relief, the sustainability of these prices will depend on demand and supply dynamics. Oil marketing companies are still facing losses, despite government relief through excise cuts. If oil prices stabilize at lower levels, consumers could benefit from reduced prices.
Brent crude had dropped to $83 a barrel on Monday, with the estimated cost for Indian refiners at $82.84. However, consumer prices are influenced more by international petrol and diesel prices, which were higher by 22% and 43% respectively in June. Sakshi Gupta, principal economist at HDFC Bank, stated that the recent de-escalation in conflict and lower oil prices could positively impact inflation and growth in India. She highlighted that a $10 increase in oil typically raises inflation by 20-30 basis points and drags growth by 20 basis points.
The reduction in oil and fertilizer prices is expected to alleviate pressure on government finances, particularly as the subsidy bill is projected to rise significantly. The Centre faces pressure to increase support for soil nutrients and manage losses from subsidized gas cylinders. Oil marketing companies are currently losing around Rs 700 crore daily on fuel and cooking gas, which has resulted in zero direct tax contributions. Madan Sabnavis, chief economist at Bank of Baroda, indicated that while the fertilizer subsidy may increase, it will not double as previously suggested, and there will be no new price hikes by oil companies if peace negotiations succeed.
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