Bad days ahead

There is raging debate going on over the impact of demonitisation on Indian economy. But the actual impact will be clear only after March. Critics argue that economy is sliding down and it will negatively affect the country. While those supporting the move believe that in the long run it will help Indian economy. As the debate continuous over demonitisation goes on, there is some bad news for the economy. The global crude oil prices jumped to their highest levels in a year and a half, today, after OPEC and non-OPEC producers agreed to decrease oil output to ease a global glut. Brent crude oil futures increased 4.4 percent, to 56.72 dollars a barrel. U.S. crude jumped 4.8 percent, to 53.98 dollars a barrel. It is expected that crude oil prices will continue to surge in days to come.
This is really a bad news for India. India imports a major part (around 70%) of its crude oil requirement. The increase in crude oil price will lead to high inflation which can have catastrophic effect on the economy. The global crude oil prices have been quite volatile, falling from a high of $115/bbl in mid-2014 to a low of $28/bbl in January 2016. For the last two years the fall in crude oil prices helped the country to save on import bill, thereby narrowing its current account deficit (CAD). Lower CAD, coupled with strong foreign capital inflows, has helped India build up its forex reserves, which, in turn, has reduced its external vulnerability. Decline in crude oil prices also helps the government manage its finances better as it translates into lower subsidies on petroleum products (LPG and kerosene), thereby resulting in lower fiscal deficit. Government of India needs to gear up to face the challenges that will arise due to increase in crude oil prices. If proper steps are not taken to deal with the situation, the country’s economy will take severe beating in months to come.

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