Subject: high oil price Reference : 11th five year plan india HIGH OIL PRICES 2.28.The impact of higher oil prices on our growth can be significant and will depend on the strategy we adopt to deal with the situation. A 25% increase in oil price from US$ 80 per barrel can be expected to increase our import bill by 5% and the current account deficit to GDP ratio by a little over one percentage point of GDP. Base year deficit at around 1.1% of GDP is projected to increase to 2.4% of GDP by the terminal year. With higher oil prices, the deficit is likely to increase further, but would still be financiable. In fact, it would enable us to deal with foreign inflows which, at present, appear excessive. The additional foreign exchange cost of oil imports therefore should not present a serious problem. The more important issue is how we deal with the need to pass on high oil prices to the consumer. The present policy of insulating consumers from the full impact of the rise in the global price of oil is not sustainable as the public sector oil majors bear a very large burden in terms of under-recoveries and there are also fiscal costs which run into constraints posed by the FRBM Act. It is always possible to undertake some subsidization for those who are really needy, but the bulk of the under-recoveries at present are not on account of such targeted subsidization. As and when the global price is passed on fully to the consumers, it would reduce the demand for oil, mitigating the impact on the balance of payments, and also raise the general level of prices somewhat. Given the low rate of inflation at present, this one-time adjustment could be absorbed in the system without too much disruption. A price adjustment would also moderate growth to some extent in the short run but it would not significantly affect growth in the medium term.
Posted on: Thu, 05 Sep 2013 01:06:49 +0000
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