Citigroup Global Economics
India: A Fly In The Ointment
Macro Implications of Rising Oil Prices — Oil prices crossed the US$90/bbl level intra-week, with the jury still out on whether QE driven or fundamental factors are responsible. India is one of the world's 10 largest oil-importing nations and, as has been highlighted previously, higher oil prices are beginning to take a toll on the macro.
A quick re-cap − a US$1/bbl increase in oil prices increases the trade deficit by US$700mn and raises oil companies' underrecoveries by a similar amount. As for inflation, the impact is a bit difficult to quantify: though prices of petrol and industrial fuels are market determined, the price adjustment at times takes place with a lag, while the government regulates prices of cooking fuels as well as diesel.
Current Account Deficit (CAD): Higher, But Less Pressure Than in Past – India imports ~75% of its crude oil requirements, with oil comprising over 30% of its import bill. While higher oil prices undoubtedly will result in a higher CAD, the pressure will be a bit less than before due to hydro-carbon discoveries and higher petroleum exports.
Our FY11 and FY12 estimates incorporate average prices of the Indian basket at US$80/bbl and US$90/bbl respectively which results in the CAD at US$49bn in FY11 and US$59bn in FY12 or ~3.1%.
Fiscal: Rising Under-recoveries = Higher Subsidies — Earlier this year, the govt de-regulated petrol prices and partially raised prices of diesel and the cooking fuels. However, despite that, oil companies were making losses and no provisions have so far been made to compensate them. Our oil analysts Saurabh Handa and Garima Mishra have worked out 3 scenarios for FY12. As shown on pg 2, oil under-recoveries could potentially rise to Rs880bn, resulting in a rise in the subsidy bill.
Inflation: Downtrend May Not Last Long — Inflation, as measured by the WPI, has been on a decelerating trend since April 10. While the base effect will result in the numbers coming in the 6-6.5% range by end March, prices in 2011 are likely to remain sticky. Besides the impact of structural factors behind food inflation, higher oil prices could also take their toll.
An adjustment of prices of petrol and diesel would have a direct impact of 62bps on inflation. As regards cooking fuels, assuming that steps are taken toward meeting the Kirit Parikh recommendations. The direct inflationary impact would then be 96bps. This is in addition to the impact of market determined fuel prices (ex petrol), i,e naphtha, furnace oil, bitumen etc, which have a wt of 1.9% in the index.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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