[Answered] Examine how lower global oil prices provide a short-term fiscal advantage to India. Critically analyze the structural factors that make this relief cyclical and unsustainable.

Introduction

With India importing over 85% of its crude oil, every $1 fall in oil price improves its current account by $1.6 billion (RBI, 2024). Yet, this fiscal relief remains transient and cyclical.

Short-Term Fiscal Advantages of Lower Global Oil Prices

1. Improved Fiscal Balance: Lower crude prices reduce India’s import bill (worth $137 billion in 2024–25). This leads to improved Current Account Deficit (CAD), reduced fiscal pressure, and higher macroeconomic stability. According to the IMF (2024), a $10/barrel decline in crude prices can improve India’s CAD by 0.3% of GDP.
2. Reduced Inflationary Pressure: Cheaper crude lowers transportation and manufacturing costs, curbing Consumer Price Index (CPI) inflation. For a consumption-driven economy, this raises real disposable income, boosting aggregate demand. As per NCAER (2023), every 10% decline in oil price reduces inflation by nearly 0.5 percentage points.
3. Fiscal Space for Public Investment: The government often retains part of the benefit by not fully passing on price cuts to consumers. This improves revenue buoyancy and enables higher capital expenditure in infrastructure, renewable energy, and welfare.
4. Exchange Rate and Monetary Stability: Lower oil imports reduce dollar demand, strengthening the rupee and aiding RBI’s external stability goals. It also gives the central bank room for monetary easing to spur growth.
5. Energy Security and Geopolitical Leverage: With cheaper oil, India can diversify its suppliers beyond Russia or OPEC+ and enhance its strategic petroleum reserves (SPR), increasing resilience to future price shocks.

Structural Factors Making Relief Cyclical and Unsustainable

1. Cyclical Nature of Oil Market: The global oil market is inherently volatile, driven by OPEC+ production cuts, U.S. shale output, and geopolitical disruptions. Historical cycles (e.g., 2014–16, 2020–21) show temporary dips followed by rebounds.
2. Low Domestic Energy Self-Reliance: India’s import dependency (85%) exposes it to external supply shocks. Despite investments in renewables, domestic crude output has stagnated around 30 million tonnes annually for a decade (Petroleum Ministry, 2024).
3. Fiscal Myopia in Utilizing Windfall Gains: Instead of building a sovereign oil stabilization fund, India often uses windfall savings for consumption-based subsidies, which are politically popular but fiscally unsustainable.
4. Exchange Rate Pass-Through and Volatility: A weakening rupee or strong dollar can neutralize gains from cheaper crude. The rupee depreciated 3.5% in 2023–24, offsetting part of the oil-price advantage.
5. Energy Transition and Climate Constraints: Global shifts toward decarbonization and EV adoption are transforming oil demand patterns. This “demand plateau” phase makes price movements unpredictable, complicating India’s energy planning and fiscal projections.
6. External Sector Vulnerabilities: Lower oil prices depress remittances and exports to West Asia (India’s largest labour market), offsetting gains in the trade balance. For instance, a 10% slowdown in Gulf economies cuts remittances by $2–3 billion.

Way Forward

1. Diversify the Energy Basket: Accelerate investments in solar, green hydrogen, and ethanol blending to reduce import dependence.
2. Institutionalize an Oil Stabilization Fund: To absorb fiscal shocks from price fluctuations.
3. Rationalize Fuel Taxes: Introduce a flexible tax mechanism that smooths price volatility without hurting consumers.
4. Enhance Strategic Petroleum Reserves: Target 90 days of imports (currently ~30 days) for energy security.
5. Promote Demand Efficiency: Encourage EVs, public transport, and BEE-led industrial energy optimization.

Conclusion

Oil wealth is fleeting without reform. India’s true resilience lies in fiscal prudence, energy diversification, and strategic foresight beyond transient price windfalls.