By Chris Wright
Earlier this week, I started a series on countries that will benefit from the decline on oil prices with a piece onTurkey. As we discussed, countries that have a deficit in their oil supplies stand to benefit strongly from lower oil prices. The second example in the series is India.
Much of Asia is well-positioned for low oil prices. “Given that most economies in Asia are importers of energy, the correction in commodity prices bodes well for the region’s current account and inflation outlook,” says Taimur Baig, Deutsche Bank’s chief Asia economist. “This is welcome news particularly for deficit economies like India and Indonesia.” (Indonesia will be the third in the series.)
India imports almost 80% of its oil, so, like Turkey, it benefits from lower prices as its import bill falls and, with it, its trade deficit. Normally, you would expect low oil prices to help to keep a lid on inflation too, and also the fiscal deficit, since India has long subsidised fuel prices, which requires a lot of money from the government.
The oil price decline is well-timed for India as it follows a lot of hard work to get the country’s fiscal position into decent shape. “India [will be] hoping to enjoy some dividend from strong fiscal, monetary and structural measures of recent years, as well as good will from investors with respect to its new government,” says Baig.
That said, the oil price might not find its way into easing the fiscal deficit as quickly as one might think. As this article explains, quoting Credit Suisse research, there was already a considerable shortfall in subsidy payments relative to the budget from the previous financial year; the low oil price might make it easier to cover that gap, but probably won’t start to make a big difference to the deficit until the next financial year, which is April 2015 to March 2016. The same research also points out that the benefit to the trade deficit appears to have been cancelled out by slowing exports in an environment of weak global growth, and a sudden and huge increase in gold imports. India is, after all, a big exporter, and if some of the world’s bigger consumption demand countries experience slower economic growth (which is part of what the oil price fall is telling us), then that is bad for India.Read full article