The previous estimates were conservative because the exchange rate for the rupee was presumed to be 65 a dollar. However, in the time that followed, the rupee has traversed a steep fall against the dollar. On October 22, the exchange rate was Rs 73.52 a dollar, and it has hovered around Rs 72.22 a dollar in the second half of the financial year.
The triple whammy
A weak rupee, rising crude oil prices and the impending US sanctions against Iran that take effect on November 4 will usher in a tough time for the Indian economy and will push India’s oil imports bill. The benchmark Indian crude oil basket is now estimated to average US$77.88 a barrel for FY19, compared to the government’s earlier estimate of $65 a barrel for the year and $56.39 for FY18.
Rising global crude oil prices, along with other factors, have wreaked havoc with fuel prices back home. The outcry generated by rising petrol prices forced the government to cut excise duty on October 4.
“The current situation will have an impact on our trade deficit and fiscal deficit, and our foreign exchange (forex) reserves will continue to deplete. The government should take immediate and stringent steps related to petroleum conservation, encouraging of renewable fuels, and increasing the share of gas in the energy basket, as domestic production increase and cut in imports by 10 per cent may take some time to materialise,” said Deepak Mahurkar, partner and leader (oil and gas), PwC India
For every $1 increase in crude oil prices, the impact on the current account deficit (CAD) is likely to be $1 billion. If estimates are anything to go by, the CAD is expected to widen to $72-77 billion (2.8 per cent of gross domestic product or GDP) in FY19, from $48.7 billion in 2017-18 (1.9 per cent of GDP).