The US-led coalition’s air strikes against Islamic State militants in Syria could push up oil prices, fan inflation and dash hopes of lower borrowing rates ahead of the festival season just when the Indian economy is showing signs of clawing out of its deepest slump in 25 years.
The unrest in oil-rich Middle East isn’t good news for millions of Indians who have been looking forward to lower fuel bills amid signs that petrol prices could come down further, as early as next week aided by plunging crude oil prices that touched $97 a barrel — the lowest in two years.
This had triggered hopes that the creeping increase in monthly diesel bill may also end soon, as the government could anytime announce de-regulation of diesel prices on the back of declining global oil prices.
The crisis in Syria and Iraq, India’s second largest crude oil supplier after Saudi Arabia, and a possible hardening of oil prices, however, could turn the clock back.
For a start, it could mean that India will need to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation.
And high inflation means that the RBI will hesitate to cut interest rates, a step needed to boost economic growth. So, consumers need to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and fuel rises.
And it's not just households that will take the hit.
Companies that import raw materials will hurt badly if crude prices harden and the rupee weakens because of higher dollar demand.
The rupee’s value fell by 12 paise to come close to 61 to a dollar on Tuesday.
India, the world's fourth-largest oil consumer, imports around 190 million tonnes of crude oil a year — costing $145 billion a year, or more than a third of its total import bill.
With every dollar increase in oil prices, the government's oil import bill goes up by approximately Rs 4,000 crore.
A $2-4 per barrel increase in crude oil prices on an average would mean increasing India's oil import bill by Rs 8,000 crore to Rs 16,000 crore.
While higher crude oil prices will have a knock on effect on inflation, it also can weaken the rupee as demand for dollars go up to meet import payment obligations.
Retail inflation eased in August to 7.8% year-on-year from 7.96% the previous month, latest price data showed, although that is still above the central bank's target of 6% by 2016.
India’s wholesale inflation rate — the main gauge to capture country-wide price movements — had plunged to a five-year low of 3.74% in August, prompting industry leaders to ratchet up their demand for lower borrowing costs to assist investment plans, critical to spin jobs and multiply income.
Importantly, hardening of crude prices could hit plans on oil price deregulation.
Watch: US Navy launches air missiles to target Islamic State in Syria
Crude oil prices are perhaps the most important variable in India’s complex energy economics. Part of the reason for India's relative lack of competitiveness among Asian manufacturing exporters is its expensive energy.
Dismantling its high-cost energy economy has been a crusade India’s policymakers have long waged and overdependence on imported crude oil hasn’t helped.
The recent fall in crude to sub-$100 a barrel had raised hopes that India would finally be able to free-up diesel prices.
Market-determined fuel prices would cut subsidies and help cut taxes on petroleum products. This can offset the shocks when global crude prices shoot up. It remains to be seen how the escalation in crisis affects India's plans for that one big step in energy reforms.