Economic Survey 2022| Crude oil pegged at $70-$75 a barrel, caution over inflation due to energy imports

The Economic Survey 2022 estimated India's Gross Domestic Product (GDP) growth rate at 8.0-8.5 percent in 2022-23, which hinges on crude oil prices being in the range of $70-$75 a barrel.

India's oil and gas import bill soared in the nine-month ended December in FY2022 as global crude oil prices inched up. Since December, the benchmark Brent crude futures have moved up further, breaching the $90 a barrel earlier this month. This is the highest level of crude prices since 2014; experts expect further upside.

Commenting on the GDP growth rate prediction, the Economic Survey said, "This projection is based on the assumption that there will be no further debilitating pandemic related economic disruption, monsoon will be normal, withdrawal of global liquidity by major central banks will be broadly orderly, oil prices will be in the range of $70-$75/bbl, and global supply chain disruptions will steadily ease over the course of the year."

CRUDE OIL PRICE

Crude oil prices have been rising from lows of $68 at the beginning of December as demand remained strong, unperturbed by the rapid spread of the Omicron variant of the Covid virus, even as global supply remained tight.

The geopolitical tension in West Asia and the threat of a Russian attack on neighbouring Ukraine has intensified concerns over supply disruptions. Brokerage Goldman Sachs expects crude oil to reach $100 per barrel in the last two quarters of 2022. Any major fluctuation in crude oil pricing puts pressure on domestic crude producers.

"The FY23 GDP projection assumes that Crude will remain in the $70-75 per barrel range. This may be optimistic given that crude is holding above $90 and the global outlook for oil in the next 18 months has an upward bias. As such Indian GDP growth has a sensitivity of -0.3 to -0.4% to every $10 increase in crude per barrel." Debasish Mishra, partner & leader, Deloitte India, told Moneycontrol.

In April-December 2021, inflation in 'fuel and light' and 'transport and communication' was mostly driven by high international crude oil, petroleum product prices, and higher taxes.

The document stated that since the second half of October 2021 crude oil prices had softened, due to factors including rising COVID-19 cases in Europe, and the possibility of release of crude oil from strategic reserves by the USA and other countries.

Further, a cut in central excise duty on petrol and diesel followed by a reduction in value added tax by the majority of the state governments led to a moderation of retail selling price of petrol and diesel in India in 2021.

"However, crude oil price again witnessed an uptick in January 2022 with tight supply amid concerns about rising geopolitical uncertainties in Eastern Europe and the Middle East," the Economic Survey said.

ENERGY PRICES CAN CAUSE IMPORTED INFLATION

India's petroleum, oil, and lubricants (POL) imports rose by 119.2 percent to $ 118.3 billion in the nine months ended December in FY2022, over the corresponding period in FY2021 and by 22.3 percent from the same period in FY2020, according to the Economic Survey 2021-22.

"The crude oil price (Indian basket) surpassed the pre-COVID level and was as high as $ 82.1 per barrel in October 2021. On the other hand, the volume of POL imports rose higher than last year, but remained below the pre-pandemic levels," the document said.

The Economic Survey said that India does need to be wary of imported inflation, especially from elevated global energy.

"The inflation in 'fuel and power' group of WPI was above 20 percent reflecting higher international petroleum prices. Although the high WPI inflation is partly due to base effects that will even out, India does need to be wary of imported inflation, especially from elevated global energy prices," the document stated.

Coal and crude oil constitute the majority of the Indian energy consumption basket.