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The sharp fall in international oil prices would dramatically alter sentiment in favour of big oil importing countries such as India. As crude prices inch closer to $100, it is hoped many of India’s macroeconomic ills will self-correct. With commodity prices, in general, also coming down by over 15%, there is expectation of oil and commodity importing economies cooling off a bit from their inflationary highs. The Indian stock markets are already reflecting this positive change in sentiment. The first six months of this year saw oil and commodity importing countries like India and China getting mauled even as exporters of crude and metals — Brazil and Russia — did well. However, in the past six weeks or so, stock markets in India and China have held up while oil and commodity exporting countries have experienced up to 25% fall in their stock market indices. The growing divergence in the trajectory of stock markets in the commodity importing and exporting economies is also subsiding now. This is all for the good. The oil price spike had particularly impacted India because it continues to follow a quasi peg to the dollar. Since oil is dollar denominated, India got badly hit. More so because it chose not to appreciate the local currency beyond a point in 2007-08 when there was consistent upward pressure on the rupee.
The other big benefit of oil prices coming down is that the central bank can breathe easy and not be under pressure to hike interest rates. The inflation rate may come down to a single digit sooner than we realise. Remember there is a fair amount of oil — naphtha, furnace oil, etc., — being imported and sold at market prices. The impact of lower prices on these will be felt immediately. Of course, on oil products under administered prices the positive impact will be felt in terms of the off-budget borrowings by the government going down. If oil comes below $100 a barrel on a consistent basis, the fisc should easily self-correct by over 1% of GDP. With macro indicators improving, the next challenge will be to ensure that growth does not fall below 7.5-8%. That may not be an easy task given the deepening slowdown in the OECD economies. It may be the right time to evolve a focused, domestically-driven growth strategy.
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