Consistent spike in crude oil prices hurting India’s economic recovery

Crude oil prices have constantly spiked due to OPEC’s supply restraints (Organisation of the Petroleum Exporting Countries) for almost a year. 

Crude oil prices touched a two-year high in the last month after the Brent crude surpassed $71 per barrel. Presently it is trading around $74 per barrel.

This sharp rise in oil prices has impacted every industry sector of the countries importing oil, for instance, India. Concerned over its negative effect on inflation and the overall economy, the Indian Government has taken up the matter bilaterally with the oil manufacturing countries and OPEC.

Along with oil-producing countries, OPEC agreed to increase the oil output by 0.4 million barrels per day from August 2020 to December 2020.

It is expected that the crude oil prices will hinder the pace of the economic recovery of the country, which was derailed due to the resurgence of the devastating second wave of COVID-19.

In India, this has led to inflation and a current account deficit. Let us see how the price hike is impacting businesses in our country across various sectors:

Transport sector:

Since the start of 2021, the petrol price has shot up by more than Rs.10 per litre and that of diesel has increased by more than Rs.11. This has increased freight rates across the transport sector, which has led to a consequent rise in the cost of other commodities. This rise has also negatively impacted the automobile sector, as it discourages people from purchasing commercial and consumer vehicles. 

Airline sector:

The Aviation industry is already coping with the losses resulting from diminished air traffic in the wake of the COVID-19 lock-down. 

High aviation fuel prices are further hampering the profitability of the airline sector. The aviation industry has increased the airfare as a consequence of the increase in operating costs of airlines. 

Cement:

Spike in the crude prices further push the petroleum coke prices, thereby increasing the cost price of the cement firms. This is coupled with increased freight costs and reduced spending power due to inflation, harming the business of paint and cement companies.

FMCG:

The fast-moving consumer goods (FMCG) sector is highly volatile to crude oil prices. Right from the start of procuring raw materials to the packaging of finished products, transport cost is one of the essential components of the total cost of these products. As this high input cost is passed on to the consumers, their demand is negatively impacted. Further, the purchasing power of the country is already hit due to inflation and COVID-related economic disruption.

What measures do you think the government should take to check the spike in crude oil prices, knowing that their tax revenue has also been impacted in the last year?

For any clarifications/feedback on the topic, please get in touch with the writer at jyoti.arora@cleartax.in