OPEC+ production cut ahead of winter puts India on a slippery slope

Source: The post is based on an article “OPEC+ production cut ahead of winter puts India on a slippery slope” published in The Business Standard on 8^th October 2022.

Syllabus: GS 3

Relevance: rising oil prices and its impact on the Indian economy

News: OPEC Plus countries which includes the world’s biggest oil exporters Saudi Arabia and Russia have decided to cut production from November by 2 million barrels a day.

It will have impact all around the world including India.

What will be the impact on India?

The change in the oil price matters more to India’s economy than any other country’s economy because India imports around 87 per cent of its oil.

Further, the imports this year have increased from last year. For example, petroleum imports accounted for 28 per cent of India’s total import this year while it was 23 percent a year earlier.

India also imported close to $32 billion worth of coal last fiscal which was around one per cent of gross domestic product (GDP).

This may widen India’s current account deficit from 1.4 percent in FY22 to 3.5 percent of GDP in FY23.

World bank has also cut economic growth forecast for India from 7 percent to 6.5 per cent this fiscal year due to the high inflation, rising borrowing costs and high commodity prices.

Further, India consumes around 4 million barrels a day and the cut in production will raise oil prices in the upcoming months. This will put more pressure on the rupee and will further weaken the economy.

Natural gas prices have already increased around Rs 2.5 trillion this fiscal year and there may be a further increase in the prices.

OPEC have also agreed to extend its production co-operation agreement with non-OPEC members like Russia until the end of 2023. This means that India should be ready to face the upcoming impact on its economy.

However, the demand in India continues to be strong even with petrol and diesel retailing at close to Rs 100 a litre and the lower oil production will only impact prices, supplies are not an issue.