“Crude Cost Of Someone Else’s War..,” Poses Varied Challenges To Indian Economy, Says Kotak Securities

“Crude cost of someone else’s war..,” poses varied challenges, says Kotak Securities

A sharp surge in global crude oil prices from the Russia-Ukraine conflict has threatened to push up imported inflation and widen the India’s trade and current account deficits.

Oil prices soared more than 6 per cent to above $130, their highest since 2008 on Monday, as the risk of a US and European ban on Russian oil imports and delays in Iranian talks triggered tight supply fears after having climbed over 20% last week.

“Crude cost of someone else’s war. The Russian invasion of Ukraine and likely lower exports of Russian crude oil will keep crude oil prices elevated for a protracted period. We estimate the Indian economy to incur an additional $70 billion burden, 1.9 per cent of gross domestic product (GDP), versus FY2022 levels at an average crude price of $120/ per barrel. Also, we see significant upside risks to inflation and down increased side risks to corporate profits through pressure on margins and volumes both,” wrote analysts at Kotak Securities .

Global crude oil prices have risen from around $80 per barrel on November 4, 2021, to over $130 per barrel today, an increase of about 60 per cent.

That surge has increased worries on the economic impact on India, as already-high inflation is expected to increase further and, in turn, hurt slowing economic growth.

“Steep crude prices will pose stiff challenges in the form of a higher current account deficit as a percentage of GDP, higher inflation and lower growth. The additional cost will be borne by the government – in the form of lower excise revenues and higher MSPs, by households – in the form of higher retail prices of petroleum products and companies.

While the last revision in retail prices of petrol and diesel in India was four months ago, on November 4, 2021, the latest surge will eventually have to be borne by households.

“Households will have to bear the bulk of the burden of higher gasoline, diesel and LPG prices assuming oil companies do not bear any share, and the government bears some share on auto fuels. We estimate the direct impact at $22 billion. In addition, They will also bear the indirect impact of higher fuel and freight costs as and when companies pass them on to consumers,” noted Kotak Securities’ analysts.

“The impact will get diffused across 350 million households, but the burden will fall disproportionately on lower- and middle-income households. About $23 billion impacts on companies; a bulk of the impact will be transferred to households,” they added.

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