India imports oil in the following share as per FY 21 numbers:
Iraq 17%,
Saudi Arabia 16%,
UAE 14%,
USA 9%,
Qatar 8% and
others 38%
India’s import share for oil from Russia is under 2%, an insignificant number. India imports about 290 million tons of oil in a year. Assuming that oil prices are at $75 (last year), India’s oil import bill is ~ $165bn. India exports refined petroleum products as well. If oil is priced at $75, those exports would amount to $58bn. This equates to an oil trade deficit of $107bn.
If oil is at $100, India’s oil trade deficit (imports – exports) would be ~ $140bn. For every $10 rise in crude oil from $100, India’s oil trade deficit will rise by about $15bn. For instance, if oil is being sold at $120, it would be ~ $170bn.
How does this impact India? India’s ex-oil goods trade deficit at current run rate is likely to be ~$100bn. At $100 oil, add $140bn to trade deficit and it totals to $240bn, which is a large deficit number.
How does the balance of payment (BOP) stack up at this number? Assuming India goods trade deficit at $240bn with oil at $100, India is likely to have a surplus of ~$110bn on net services exports, $80bn in inflows through remittances (NRI’s sending money into India) and India sees outflows of $38bn in primary income.
Let’s total the current account now:
Goods trade deficit -240bn
Services surplus +110
Remittances +80
Primary income -38
Total current account deficit -$88bn
How do we cover this on BOP?
This gets balanced through financial and capital account. India gets, on average, $45bn in FDI inflows and can get $10bn in FPI inflows totalling $55bn. It also raises $25bn through ECBs and other short-term loans. Adding the changes in banking capital ($5bn) and all above heads: $55bn + $25bn +$5bn = $85bn.
So India’s BOP can remain normal when oil trades between $95 to $100. What happens when oil prices spiral? For every $10 rise the trade deficit rises by $15bn. Almost all the other heads do not move as quickly as oil deficit can. In that scenario, it can become a direct headwind for India.
But, oil has to be at or above $100 for 12 months for this impact in numbers. There are two other areas of impact as well. For every $10 rise in oil, it adds 90bps to wholesale inflation and about 25bps to consumer inflation in India over a 12-month period. During a market correction, India’s financial account can see FPI outflows which adds stress to BOP.
What happens now?
In case oil prices trade above $100 for a few weeks and revert back below pre-conflict levels of $90, India will have minimal impact. If oil stays above $100 or say $120 for even 3 months or more, India’s external situation will deteriorate.
How does the crisis gets baked into the markets?
If there is a de-escalation or ceasefire, Russia’s oil and gas will slowly come back to the market and oil prices will cool.
Companies fearing western sanctions are taking it slow to do business with Russian O&G. De-escalation will have to be seen in this context. Also, most conflict when nuclear powers are involved tend to see some ceasefire rather than escalation. This needs to be monitored. In case western countries sanction Russian oil and gas, the price spiral could be strong and swift. That will be a negative for India. The world doesn’t have quick supply side fixes if Russian energy supplies goes out of market.
With a cushion of $635bn in forex reserves, India can withstand short-term volatility quite well. But this ability can get challenged if oil prices keep rising. On the contrary, if this situation normalizes India stands to benefit a lot more than its peers.
(The author, Sahil Kapoor, is Head of Products and Market Strategist, DSP Investment Managers. Views are his own)
