Crude Oil Spike: Every $10 Rise Above $70 Could Slash India's GDP Growth by 0.25%
PwC's Ranen Banerjee warns that every $10 rise in crude oil above $70 could shave 0.25% off India's GDP growth and widen the current account deficit.
India's macroeconomic stability is facing a significant challenge as sustained high crude oil prices threaten to dampen economic growth and widen the current account deficit. According to Ranen Banerjee, Partner and Leader of Government and Public Sector (GPS) at PwC India, there is a direct correlation between rising oil costs and a slowdown in the nation's GDP.
In an exclusive interview with ANI, Banerjee revealed that for every USD 10 increase in crude oil prices above a baseline of USD 70 per barrel, India's GDP growth could be reduced by approximately 0.25 percentage points. While crude prices have touched levels around USD 115 per barrel, the average is expected to fluctuate between USD 90 and USD 100.
The Ripple Effect on the Economy
The impact of elevated crude prices is not limited to the energy sector; it trickles down into the real economy, affecting everything from corporate expenses to the spending power of the average citizen. Banerjee noted that high oil prices create a chain reaction that hits corporate input costs and consumer demand.
GDP and RBI Forecasts
Despite these pressures, Banerjee believes that India's GDP growth could still land around 7 per cent for the current financial year. He suggests that the Reserve Bank of India (RBI) may not need to trim its forecasts immediately because the full impact of oil price hikes typically materializes with a lag, and with October already passing, the remaining window of the fiscal year is limited.
Current Account Deficit (CAD) Concerns
One of the most immediate risks is the widening of the current account deficit due to a ballooning import bill. Banerjee provided a stark example: if crude oil prices stay around $90 for a six-month period, it could add an extra load of $15–20 million on the current account, which translates to roughly 0.5% of the GDP.
While India's exports have shown resilience in the face of geopolitical turmoil, the expert noted that growth in this sector could have been even stronger had these disruptions not occurred.
The Inflation Trap: Wholesale vs. Retail
The battle against inflation is becoming more complex. Banerjee pointed out that sustained high crude prices could add 30–40 basis points to inflation. Interestingly, consumer price inflation has remained relatively muted because the government has avoided passing the increased fuel costs directly to the public at the pump.
However, the "hidden" inflation is already visible in the wholesale market:
- Wholesale Price Inflation: Already reaching the 11–12 per cent range.
- Corporate Pressure: Companies are currently absorbing the rising input costs, but this is becoming increasingly unsustainable.
- Consumer Risk: If companies are forced to pass these costs to consumers, the price of essential goods will rise, which will inevitably shrink discretionary spending and overall demand.
"High oil prices actually percolate throughout the economy, even though pump prices for fuel have not increased. So yes, it's a worrying thing for the Indian economy," Banerjee stated.
Geopolitical Red Flags
The stability of global energy supplies is currently under threat from geopolitical tensions in critical maritime corridors. Banerjee highlighted that while disruptions in the Strait of Hormuz were already a cause for concern, the emerging risks around the Bab el-Mandeb Strait have added a new layer of vulnerability to oil shipments.
The combination of these supply chain risks and high prices continues to pose a persistent threat to India's economic trajectory.