New Delhi: Any huge spike in crude oil prices following Iraq crisis coupled with a deficient monsoon due to El-Nino, have the potential to delay the economic revival plan of the Prime Minister Narendra Modi. “High crude oil prices have a negative impact on the fiscal deficit and has implication on growth as India is import dependent country. It can delay economic revival,” D. K. Joshi, chief economist, at rating agency Crisil told this newspaper.
Increase in global prices will push up the subsidy bill of the government and may force it to cut its spending to meet the tight fiscal deficit targets which can hit the growth. Any increase in subsidy bill at this juncture will not be liked by the investors, especially foreign.
Though under-recovery on diesel sale has come around to Rs 2.80 per litre, it could shoot up. This will test the resolve of the government to continue with monthly increase in diesel prices. Brent crude oil has shot up to a peak of $114.69, its highest since September due to crisis in Iraq. But later came down to $113.20 per barrel.
Iraq which is OPECs second-biggest oil producer, is facing an armed conflict with the Islamist militants. US has threatened to use airstrikes to help the government. The other problem faced by the government is the threat of deficient monsoon due to a weather phenomenon ‘El Nino’.
“For all its achievements in recent decades, with soaring high-tech exports and a burgeoning middle class, India’s economy remains dependent on plentiful rains. A good monsoon means a better harvest, higher rural incomes and lower prices for all; a bad one, and things suddenly look a lot more challenging,” said a report by HSBC Global Research earlier this week.
In 2009, another dry year, food prices jumped over 20 per cent. The Reserve Bank of India (RBI), in that case, would be hard-pressed to stick to its retail inflation target of 8 per cent by early next year without raising rates again. The RBI on June 3, left key rates unchanged and unlocked about '40,000 crore of Funds by reducing the amount of deposits banks are required to park in government securities.
“As it happens, droughts in 2004 and 2009 also coincided with general elections. In both cases, promised reforms by the new governments were delayed as politicians needed to deal first with the harsh reality of a dry Indian summer,” said the report.
