New Delhi: The Narendra Modi government could soon face its first major test in macroeconomic management as the looming US nuclear sanctions on Iran drive up the global oil market, fuelling speculation of the return to the above $100 a barrel price. With the next general elections round the corner, it would be interesting to see if it can stave off pressure on macro fundamentals without provoking political backlash.
US sanctions are slated to kick in only on November 5 but initial fear has already shaken up the global oil market, sending the benchmark Brent crude above $80 a barrel, 17% higher than the average price of $69.08 a barrel.
The front-month Brent crude futures were at $82.17 per barrel in intra-day trading on Thursday, 1% that the previous day’s closing price, according to Reuters.
The previous UPA government had a tough time managing macro fundamentals in the face of abnormally high oil prices. For example, the average Brent price for May 2014 was $109.54 a barrel.
The oil market started its descent since June 2014 and hit the historic low of $28 a barrel in January 2016.
No wonder, it has been largely a smooth sailing for the Modi government on the macroeconomic front. But the renewed uptrend in the oil market has started giving the jitters to India’s macroeconomic managers.
The rupee has already lost more than 12% of its value against the US dollar this year as doubts about the government’s ability to fund its current account deficit (CAD) have triggered flight of foreign capital. The country’s forex reserves have dropped below $400 billion, its lowest level in the last 41 weeks, as RBI moved in to firefight and prop up a beleaguered rupee.
The CAD remains under pressure as rising crude prices add to the country’s import bill. Crude import bill surged 76% in July from a year earlier to $10.2 billion and raised the trade deficit to $18 billion, the highest in five years. The global financial research firm Nomura has forecast that India’s CAD could rise to 2.8% of GDP in 2018-19 from 1.9% of GDP in 2017-18. However, if the current uptrend in the oil market continues, Nomura’s CAD projection could well prove an underestimate.
The measures unveiled by the government recently to check widening CAD have failed to impress overseas investors.
Retail prices of petrol and diesel have rise by more than 5% in September, triggering calls for government intervention to cool the fuel market.
However, the government has resisted such calls and refused to interfere with daily revision of petrol, diesel prices. But if fuel prices continue to rise at this pace, it could soon become politically infeasible for the government to stick to fiscal prudence. If the government decides to dole out subsidy to check rising fuel prices, its fiscal math could go awry.
Last year, finance minister Arun Jaitley had budgeted fiscal deficit at 3.3% of GDP but it widened to 3.5% due to shortfall in Goods and Services Tax (GST) revenue.
India’s foreign exchange reserves reached a peak of $426.08 billion on April 13, 2018. The US dollar-rupee exchange rate was Rs 64.86 at the time. However, the rupee has depreciated by over 12% since then and is now hovering near the 73 mark.
“We view that crude market risks are heavily skewed to the upside and whilst we are not explicitly forecasting Brent to rise to $100 per barrel, we see material risks of this coming to fruition,” Japanese bank Mitsubishi UFJ Financial Group said in a note to clients.
At its 2018 peak, Iran exported about three million barrels per day (bpd) of crude oil, equivalent to 3% of global consumption. Oil exports from the Persian gulf country in September have fallen to nearly two million bpd, the Reuters report flagged, citing shipping data.
The Organisation of Petroleum Exporting Countries (OPEC) and Russia have snubbed calls from US President Donald Trump to lower oil prices.
Sanctions on Iran’s crude sales are likely to put more pressure on the oil market than the last time, spurring volatility for the rest of the year, according to BP Chief Executive Officer Bob Dudley. The way the world’s financial system works means US sanctions will create roadblocks for Iran’s customers, Dudley said in a Bloomberg television interview.
Buyers from India, China and Japan will probably lack access to ships and insurance needed to move Iranian crude, among other difficulties, he added.