Oil Below $90: The Diving Oil Prices and Its Domino Effect

Oil prices wax and wane with global events and changes in financial health around the world. Recently, it took a dive, slipping below the $90 per barrel mark. Let's understand the relevance of this faltering oil price and its future implications for India's economy.

The Why's and How's of Oil Price Determination

Pricing of oil is a complex process involving various elements, ranging from global economic health to political instability in oil-rich nations. The recent plunge beneath the $90 per barrel can be credited to the hovering uncertainty caused by the global health crisis and the subsequent fall in global oil demand.

Impact on India's Economy

India being a net importer of oil, lower oil prices may seem like a blessing in disguise. It decreases the import bill, reduces inflation, and eases fiscal pressure. Cheaper oil rates helps in curtailing the Current Account Deficit (CAD), strengthens the Rupee against the Dollar and also reduces the burden on retail consumers in the form of cheaper petrol and diesel prices. However, if they remain persistently low, it may affect India's remittances adversely as most of them come from oil-rich nations.

The Geopolitical Angle

Geopolitics cannot be ignored when discussing oil prices. Countries like Saudi Arabia, Iran, Russia and Venezuela, which heavily rely on their oil income, may experience economic stress, resulting in political instability. This would potentially affect India's international relations and global strategic alliances.

Fuel Subsidy and Tax Implications

India's fuel subsidy burden will reduce, providing more room for government spending. However, low oil prices diminish tax revenues, often prompting the government to increase excise duties on fuel, partially offsetting the benefits of low oil prices to the end consumers.

In conclusion, oil slipping below $90 per barrel has significant implications for the Indian economy. Though it offers some immediate benefits such as reduced import bills and inflation, potential geopolitical instability, reduced remittances, and possible increase in excise duties on fuel could mean this low oil price is more of a mixed blessing. It's necessary for policy makers to lean into these changes and make the most of the situation, adjusting for both its positives and negatives.