Growing Brent Crude price in the international market may have an adverse impact on the Indian economy as it is bound to increase the current account deficit, bond yields, exchange rate and more importantly will put pressure on inflation. Clearly, the Indian economy is not in a position to absorb such shocks at present as it is slowly but steadily attaining pre-pandemic growth rate. As per reports, the recent spike in oil prices is the result of an outage in the pipeline between Iraq and Turkey. Observers fear that prices may further go upwards after the recent drone strike on an oil tanker in Abu Dhabi. There is apprehension that these incidents will push Brent Crude price up to $ 100 per barrel very soon. Presently, the Brent crude price is $87 per barrel. It may be noted that previously when oil prices crossed Rs. 100 per liter in India, Brent crude price was much lower. On the last day of the previous year, Brent crude price was $74.99 per barrel. Since then, crude price has increased $11 per barrel in just 22 days.
During the last 90 days, India has managed to keep oil prices in check for nearly three months. But how long will the country be able to keep oil prices in check is the million dollar question as crude prices have increased 24 per cent in the last one month and threatens to increase in another week or so. The easiest way to keep oil price static is to slash tax rates. The government did the same when fuel prices touched a record high in the country. At that time, the Centre reduced tax on both petrol and diesel by INR five and INR 10 respectively. Many states reciprocated the Centre’s move by reducing the value added tax (VAT) on fuel. Can these steps be repeated by both the Centre and the states? It seems impossible as the government’s hands are tied. When the growth rate is lower than expected, higher taxes on oil helps the government to fill it’s coffer. Previously, when global crude prices were lower, the government didn’t reduce taxes on fuel and allowed the net oil revenue to rise to 28 per cent in 2020-21 fiscal. But the rising crude prices may upset all calculations of the government. As the budget for the next fiscal will be presented soon, the expectation is that the government will increase spending on infrastructure to boost the economy. Rising oil prices may put a spanner to this effort as it will lower the net oil revenue considerably and the government may not have sufficient funds to finance such projects. In such a situation, the best possible solution is peace in west Asia, that will allow crude prices to stabilise in the international market. Otherwise, the government will have to draw a contingency plan to meet any eventuality arising out of growing crude prices to save the economy from disaster.