Narendra Modi is one of the luckiest head of government because soon after he took office as Prime Minister, oil market crashed, from $114 per barrel in the summer of 2014 to $40 range in mid-2016. This has helped Modi particularly because India is one of the world's fastest-growing oil markets.
But recently Brent started to rebound. Last week crude hit a two-year high at $64.23 per barrel (approximately Rs 4,177 in Indian currency) on an anti-corruption purge by Saudi Arabia's crown prince. Since July this year, global benchmark crude jumped 33 percent.
According to the Reserve Bank of India (RBI) estimates, if oil price hits high or even stays at that level in the year through March, inflation could rise by 30 basis points and a key measure of growth may weaken by 15 basis points.
Given the Indian general election is scheduled at some time in April 2019, it would be a difficult challenge for the Prime Minister, as the surge in oil price could widen the fiscal deficit of the country.
That threat is ill-timed for Modi, as the government is already grappling with weaker economic growth. The Union government on August 31 released the latest Gross Domestic Product (GDP), which showed growth in the quarter ended June dropping to 5.7 percent — the slowest since the January-March quarter of 2014. The Indian economy had expanded 7.9 percent in the same quarter last year.
The government's last year's unprecedented move of demonetisation and this year's implementation of Goods and Services Tax (GST) are said to be some of the primary reasons for such slow growth.
"For a net oil importer like India, a sustained rise in crude oil prices would have adverse macroeconomic implications. Higher oil prices are tantamount to negative terms-of-trade shock that weakens growth, pushes up inflation and deteriorates the twin deficits," Nomura said in its report last week.
Market experts said how Modi government tackles oil's surge will determine the future course of the government.
With the crude rallying, the government last month cut taxes on gasoline and diesel. The decision will cause government a revenue loss of Rs 13,000 crore in the current fiscal year, Bloomberg reported.
In future, due to the surge in oil prices, there could be many far-reaching economic effects in the days to come.
