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Effects of Higher Crude Oil Prices on India

May 12, 2008

India is the 10th largest oil importing nation in the world (oil imports are close to 70% of its crude oil requirements). If the average price of crude oil for FY09 is $105 / bbl, then, it will result in the FY09 trade deficit coming in at US$115bn. According to Citi,

US$1/bbl increase in oil prices results in the trade deficit widening by US$700mn. Therefore, assuming a US$15/bbl increase in the Indian basket to US$120/bbl, the import bill would rise by an additional US$10.5bn, taking the CAD to US$47.3bn or 3.6% of GDP.

To be in-line with international trends, auto fuels need to rise 18% for petrol and 43% for diesel.However given political compulsions, this is unlikely to take place. As far as the fisc is concerned, to compensate the oil marketing companies for the under-recoveries, the government is likely to issue oil bonds to the tune of Rs630bn in FY09.

How much LPG, Kerosene, Diesel and Petrol Contribute to Inflation ? See Chart below. Impact of Fuel Price Hikes on Inflation in India Overall, if the above fuel prices are changed to be in-line with international prices, they will contribute 4.70% to Inflation and the Government can never do this but burn deep hole in its own pocket. Additionally, the Indian Rupee is expected to become weaker on account of higher deficits.

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