Oil Shocks
Dr V Shunmugam
India’s crude import bill increased by 15 per cent to US $91 billion during 2008-09 due to the rally in global crude prices apart from shocks induced by volatility. Being unable to pass it on to end-users, the government had to bridge the gap at the cost of fiscal health. S&P instantly (February 2009) downgraded India’s long-term sovereign credit rating to negative from stable affecting long-term fund flows.
The country experienced a payment crisis in 1991 as the oil price shock precipitated by the Gulf war impacted the economy. The value of India’s petroleum imports almost doubled from around US $ 3.8 billion to over US$ 6 billion. Dwindling forex reserves, accentuated by weakening exports and invisibles, led to a declining ability to support its rising crude dependency. In 1990-91, forex reserves took a double blow due to weakened investor confidence. Widening current account imbalance and depleting reserves dampened investor confidence. All this led to the payment crisis. Will India continue to face the onslaught of oil price shocks or is there a way out?
The telling blow to the Indian economy from the increased volatility of oil prices in both 1990-91 and 2008-09 was clearly visible on key economic indicators such as GDP, IIP and inflation numbers. However, the sustained oil surge of 1999-00 did not have much impact, as lower volatility helps stakeholders to form realistic expectations in the market and keep their bottom-lines secure.
| Oil price shock – Lagged Reflection on Key Economic Indicators | |||||
| Target Year | % change in oil price volatility b/w pre-target year & target year | % change in GDP growth rate b/w pre & post target year | % change in external debt b/w pre & post target year | % change in IIP growth rate b/w pre & post target year | % change in inflation (WPI) b/w pre & post target year |
| 1990-91* | 120% | -82% | 94% | -93% | 85% |
| 1995-96 | 15% | 14% | 8% | -33% | -63% |
| 1999-00* | -22% | -35% | 15% | 23% | 20% |
| 2003-04 | -3% | 120% | 17% | 45% | 92% |
| 2008-09* | 145% | -21% | 30% | 12% | 112% |
| Source: CMIE, RBI, & MetaStock. *Years that witnessed Oil Price Shock, GDP estimates (7.2%) are taken from Estimates Economic Survey of India (ES) 2009-10, External debt is upto Sept 2009 ES 2009-10, **IIP Average of Apr 09- Jan 2010, WPI is for Feb 2010. | |||||
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