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India has low defence to oil shock: IMF

Subhomoy Bhattacharjee

The International Monetary Fund has questioned India's ability to handle the impact of price volatility in the petroleum sector in the face of its weak fiscal situation.

The IMF has made the comment in its country review, under Article IV, to which the finance ministry is expected to respond soon.

The review also comments negatively on the country's two spells of price rise for petrol and diesel in the past three months just after the administrative price mechanism was dismantled.

It said while fluctuations were necessary to keep retail prices aligned with international crude prices, India's mounting fiscal deficit left little room for excise concessions. The IMF has, therefore, warned that the 'government should announce a strategy for dealing with volatility in international oil prices,' especially if crude prices breach the normal Organisation of Petroleum Exporting Countries' range of $22-28 a barrel".

The Fund's review says price volatility is the biggest source of external vulnerability for India. It says without a strategy, and in the worst-case scenario, the country can face a drying up of inflows, with a draw-down pressure on non-resident Indian deposits and a consequent impact on the forex reserves.

However, it adds that because of the still closed nature of the country's economy, the current external risks are moderate. This is because though the share of the country's external trade in goods and services in the gross domestic product is only 13 per cent, it has forex reserves of $55 billion ($57 billion, according to Reserve Bank of India estimates). Moreover, the exchange rate, the Fund report says, is still "heavily managed".

According to an estimate made in the review, for every $5 rise in the price of crude, India's annual GDP growth rate will have to be lowered by 0.5 per cent, along with a rise of 1.5 per cent in the rate of inflation. The current account deficit will also swell by 0.5 per cent.

The IMF assessment takes into account the recently announced modalities of freeing price regimes for the oil companies and the concurrent decision by the Indian government to make a quarterly review of the prices. The review says the compensation formula for the oil companies must be reflected transparently in the budget.

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