Indian economy to benefit from slump in oil prices

The Indian economy will likely see significant benefits in the form of lower current account deficit, reduced inflation and higher GDP following a slump in international crude oil prices, 'Kotak Institutional Equities Research' said.

The collapse in cooperation between Saudi Arabia and Russia has triggered a plunge in oil prices that shows no signs of abating.

Saudi Arabia has been cooperating with Russia to limit supply to the oil market and prop up prices.

Market participants had expected OPEC+ (OPEC nations plus 10 non-OPEC oil-producing countries including Russia) to extend production cuts set to expire in March. But faced with the news that Russia would not participate, Saudi Arabia has decided not to go for it alone.

The kingdom has signalled it will boost production above 10 million barrels per day.

With coronavirus already savaging demand for travel and transportation, "the world is now drowning in a glut of crude oil that appears likely to persist for months," said Chris Lafakis, Energy Economist at Moody's Analytics.

For India, this may be a boon to pull out the economy from an 11-year low growth rate and rising inflation.

"Lower oil prices provide significant tailwinds to the Indian economy in the form of lower current account (50 basis points of GDP or USD 15 billion for every USD 10 a barrel decline in crude prices), lower inflation (30 bps for every USD 10/bbl fall) and improved government finances/household savings," Kotak said in a note.

The government's tax revenues saw a spike in FY2016 when crude prices fell sharply.

States will, however, lose meaningfully from lower product prices given the ad valorem nature of state VAT on petroleum products; they may also raise VAT on automobile fuels though.

Lower crude prices will benefit automobiles (lower cost of ownership), aviation (lower fuel bill), cement (lower pet-coke prices), consumer companies (lower packaging costs), city gas companies (lower gas prices), oil marketing companies (higher marketing margins on automobile fuels) and paints, it said.