Economic Survey: Oil’s importance in policymaking on wane as prices remain low

New Delhi: The second volume of Economic Survey 2016-17 presented on Friday signalled the reduced heft of crude oil prices in India’s national economic policymaking.

“It has become almost an involuntary reflex to cite geopolitics in the list of risks to oil prices, and hence to domestic inflation. But these risks may well be diminishing substantially,” the Survey said.

“The oil market is very different today from a few years ago in a way that imparts a downward bias to oil prices, or at least has capped the upside risks to oil prices,” it added.

This is a marked shift from the survey’s cautionary stance in January on rising oil prices presenting a challenge to India’s growth, as articulated in its first volume.

“Some possible challenges to growth exist. For example, the prices of crude oil have started rising and are projected to increase further in the next year. Estimates suggest that oil prices could rise by as much as one-sixth over the 2016-17 level, which could have some dampening impact on growth,” the Survey had said on 31 January.

The importance of crude oil prices in the policy space stems from India’s oil and gas import bill, which was Rs4.16 trillion and Rs43,782 crore, respectively, in 2015-16.

However, this is set to change with the National Democratic Alliance (NDA) government’s ambitious plan for a mass shift to electric vehicles by 2030, so that every vehicle on roads by then—both personal and commercial—is powered by electricity. Also, India has started selling petrol and diesel in sync with global rates from June as part of the strategy to completely overhaul the retail market.

Experts remained circumspect. “There is a view that oil prices will be down for a longer time. However, it is better to look at demand rather than prices,” said Saurabh Chandra, former petroleum secretary.

The average price of crude oil in the Indian basket has fallen from $52.49 per barrel in April to $47.86 in July. The price was $51.82 per barrel on Thursday.

“In sum, geopolitical risks are simply not as risky as earlier. Technology has rendered India less susceptible to the vicissitudes of geo-economics (OPEC) and geo-politics (Middle East). If, and to the extent that changes prove permanent, the consequences for the inflationary process need to be taken into account,” the Survey said.

Indian Oil Corporation