Saturday, December 13, 2014

Lower crude oil prices will boost India's economy



The timing of this windfall could not have been better for India’s economy. A new government with a huge mandate is in office and business is on the cusp of an upturn. 

The most obvious positive fallout is on price rise. Wholesale inflation growth could slow by around 2 percentage points, Nomura estimates. Consumer prices will ease too, though to a much less extent, it says. The spare cash from fuel cost savings, howsoever small, should increase consumer discretionary spending. Higher consumption adds to corporate incomes. Abating input costs too will widen profit margins for businesses. As balance sheets start improving, companies will be better placed to start new projects or revive stalled ones, generate new jobs and growth. 

Just as for companies, the government will be able to mend its balance sheet. The fortuitous oil-price situation released substantial savings on the fuel subsidy bill, which Nomura estimates at 0.1 per cent of the GDP. This has made it possible for the Finance Ministry to increase excise duty rates for petrol and diesel for additional revenue of up to Rs 15,000 crore this year. 

This one of the reasons I am still bullish on India. This lower oil price window should also allow the new government to push through reforms to the economy that will have even more long lasting effects. 

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