The United States President, Donald Trump, took the expected line of action on Tuesday when he announced to pull out from the nuclear treaty with Iran. However, this could prove to be a big headache for Indian Prime Minister, Narendra Modi, ahead of the elections in Karnataka. This apart, the ruling party will also have to face the electorate for parliamentary elections next year. Oil price is a crucial factor for the Indian economy and the voting pattern since it would directly impact the common man’s purse.
Though election to Karnataka State Assembly is due on May 12, fuel prices have already hit a three and a half year high. As a result, the central government took a populist action like its predecessor to hold the oil companies from increasing the price. This was also quite evident when oil marketing companies (OMCs) have not made any revision in fuel prices after April 24. The data are available on Indian Oil websites. The ruling party is already facing a number of issues like its ally Telugu Desam Party leaving the alliance and some other threatening to quit.
The American decision to leave the nuclear treaty with Iran would have the potential to increase the fuel price since the supply from that country would be reduced. Oil Producing Export Countries (OPEC) will like to make up the loss since it is their own decision to reduce production to keep the price at a competitive level. The OPEC was forced to take the production cut measures after the oil price threatened to go down sharply a few years back. In 2015, the oil price witnessed a significant drop and extended it in the next year too.
Aside from the poll prospects that the States would witness in the upcoming months, the increasing oil price could stoke inflationary pressures on the economy. As a result, demand from a consumer could dent the government’s calculations on several counts. For instance, this could unsettle the fiscal mathematics of the government apart from hurting the estimated economic growth prospects.
Another example is that the country’s current account deficit could increase by a minimum of $15 billion for every $10 increase in oil price. Alternatively, it would represent 0.6 percent of India’s GDP while the fiscal deficit could face the pressure of 0.1 percent of GDP. However, this depends on the domestic market absorbing the fuel price increase.
Fuel Price Will Not Fall
After Trump’s decision, Brent crude futures jumped 2.5 percent in respect of July deliveries to hit $76.73 a barrel. This is the biggest price after November 2014. The current action of the American president could suggest that the crude oil price would not likely to fall below the psychological $70 per barrel mark any time in the near future, Economic Times reported.
CARE Ratings chief economist, Madan Sabnavis, told ET that the union budget and the RBI had taken a price band of $65 – $70 a barrel for their calculation purposes to draw policies. However, the current situation suggested that it could be anywhere between $70 and $75 a barrel.