Crude Economics – Marco-Economic impacts of oil price rise

News: The level of crude oil prices often changes the macroeconomic outlook in India.

How do oil prices impact India’s economic outlook?

India’s macroeconomic outlook improves when oil prices are low and stable.

Whereas, a rise in oil prices means a higher Current Account Deficit and pressure on the currency. It also results in inflation and pressure on government finances.

High oil prices also lead to the reversal of the price decontrol reforms. For example, Oil Marketing Companies have stopped changing retail oil prices lately.

As a result, the system of under-recovery for OMCs is back. Under-recovery for petrol is over Rs. 13 per liter and Rs 24 for diesel.

It is putting private retailers in a weak and harmful position. They don’t have any pricing power, thus their business is becoming unsustainable. At present, they are looking to scale down their operations to cut losses. However, if the situation prevails, they may have to shut down their business.

It will discourage any private investment in this sector in the future. It will also become more difficult for the government to find investors for Bharat Petroleum Corporation.

What should be done?

Government must reduce its dependency on tax revenue from the petroleum sector. For instance, the contribution of the sector to the central exchequer was over Rs 4.55 trillion in 2020-21, which was 2.6 times more than in 2014-15.

Rationalization of taxes will make it easy to put them under the GST system. It will enable taxpayers to claim input credit and the government to impose a separate carbon tax.

A review of both direct and indirect tax systems is required, which could push up the tax-to-GDP ratio.

Government should avoid interfering in pricing and implement price decontrol effectively.

Source: This post is created based on the article “Crude Economics“, published in Business Standard on 26th May 2022.