Cheap Oil Prices Likely To Reduce Inflationary Pressures in India: Government Adviser

A fall in global crude oil prices will likely reduce India's inflationary pressures, a senior government adviser said on Monday, paving the way for further central bank easing as the coronavirus outbreak hits economic activity. Saudi Arabia slashed its oil prices over the weekend after the Organisation of the Petroleum Exporting Countries (OPEC) failed to reach an agreement with Russia to deepen production cuts aimed at shoring up prices.

"Cheaper energy helps us in the sense that it reduces the oil import bill and reduces inflationary pressures," Sanjeev Sanyal, principal economic adviser at the finance ministry told Reuters.

India imports nearly 80 per cent of the oil it needs, spending $140 billion in 2018-19. A fall in the price of crude could lower retail prices and cut transport costs for industry while allowing the government to hike taxes on petrol, diesel and other fuel products.

Sanyal said the government was focused on dealing with supply side shocks from the coronavirus outbreak and a fall in crude oil prices offered relief to government finances.

"We have a forecast of 6-6.5 per cent growth for next fiscal year. We are sticking with that for now."

Although there are only 43 known coronavirus cases in India, local pharmaceutical and auto industries, among others, are dependent on supplies from China, the heart of the virus outbreak, and Sanyal said the government was trying to put in place adequate support arrangements for those affected.

India's retail inflation likely cooled to a three month low of 6.80 per cent in February, a Reuters' poll of economists said, helped by moderating food and oil prices, which could encourage the Reserve Bank of India (RBI) to ease its monetary stance in April.

A $10 per barrel decline in crude oil prices on an annualised basis could help government finances through a nearly $2 billion fall in fuel subsidies and about $8.5 billion of potential revenues from a hike in taxes on auto fuels, a note by Kotak Institutional Equities said on Monday.

When asked whether the government would hike taxes on fuel products while partly allowing oil companies to pass on benefits to consumers, Sanyal said the government would respond as necessary to the evolving situation.

Some economists are now pricing in a sharp rate cut by the RBI in April, if not earlier.

The RBI was also watching developments and would react "appropriately if necessary," Sanyal said, citing earlier comments from the RBI governor that he was ready to act to shield the economy from the coronavirus and there was room to cut interest rates if needed.