Decline in oil prices narrows India’s trade deficit

Sai Nikesh | The Dollar Business The Oil price decline in January, 2015, has benefited India’s economy that witnessed a narrowed trade deficit during the month. According to reports, with a decline in oil prices, India’s trade deficit shrank to an 11-month low in January, favouring the government’s move to reduce the trade deficit. The trade deficit has shrunk to $8.32 billion in January, from $9.43 billion a month earlier, recording its lowest since February 2014. Falling global prices has brought down the cost of oil imports to to $8.25 billion, down 17% from December. According to the statistics by the Ministry of Commerce, total imports fell 11.39% to $32.2 billion during January, as oil imports declined over 37% to $8.2 billion on account of lower crude prices. Besides a positive impact, the lowering of global demand has also a negative impact on the country’s economy. The Commerce Ministry statistics show that exports have sharply contracted 11.19% in January to $23.8 billion due to a decrease in imports. India will be benefited with the decline in oil prices as the decline in oil demand will not only control country’s import bill, but will also save foreign exchange. However, a deep decline of the oil prices will have negative impact on country’s exports as seen above. The oil prices decline would not only affect the oil companies, but will also have negative impact on economies of oil-dependent countries like Russia and OPEC states which include Iran,Iraq,Kuwait, Saudi Arabia, among others. However, the decline in oil prices will be a favour for Reserve Bank of India in adopting growth-centric approach while making monetary policy. A fall of one dollar in global prices saves 40 billion for the country and the global decline will reduce subsidies that help sustain the domestic prices of oil products, say the research estimates. According to the estimates, a fall of $10 in crude globally could reduce India’s Current Account Deficit by roughly 0.5% of GDP and the fiscal deficit by around 0.1% of GDP. In view of halving oil prices since mid-2014, the Government of India had stated in earlier occasions that the decline in oil prices will not only help in meeting fiscal deficit targets, but will also help in allocating resources for reforms.  

This article was published on February 14, 2015.