New Delhi: The global oil market is waiting with bated breath for US President Donald Trump’s next move on the Iran nuclear deal, expected to be announced on Tuesday, four days ahead of the May 12 deadline.If Trump carries out his threat of pulling the US out of the deal and re-imposes sanctions on the Persian Gulf country, oil prices could start soaring, hitting India and other major crude importers hard.Analysts reckon that if US sanctions kick in again, Iran’s oil exports will shrink by 300,000 to 500,000 barrels a day. That would be enough to send global oil prices soaring. The market is already grappling with supply concerns due to plunging crude production in Venezuela, a major oil exporter.Meanwhile, hardening oil prices have started weighing on the India rupee. On Monday, it breached the 67 mark to a dollar for the first time in 15 months, reviving memories of the currency’s free fall in 2013, triggered by the Federal Reserve’s tightening of monetary policy.In 2013, investors panicked over India’s high current account deficit (CAD) as western powers threatened to attack Syria, sending oil prices soaring. The rupee at the time fell by over 21% between June 3 and August 28.This time, Trump has threatened not to extend sanctions waivers when they expire on May 12, unless European signatories of the deal fix what he calls its “flaws”.Oil bomb India’s CAD widened to $13.5 billion, or 2% of GDP, in the quarter ended December 2017, from $8 billion, or 1.4% of GDP, in the quarter ended December 2016, as per data compiled by the Reserve Bank of India.CAD widened due to a higher trade deficit of $44.1 billion on account of larger increase in merchandise imports, mainly crude oil and other petroleum product imports, which account for more than 40% of India’s overall merchandise import bill.Oil prices rose by over $10 a barrel between December 2016 and December 2017.Hardening of international crude oil price is likely to manifest itself via higher pressure on India’s twin deficits along with inflation while also having a marginally negative spillover on overall growth momentum, said Shubhada Rao, YES Bank’s chief economist.A 10% increase in oil price could potentially increase headline CPI inflation by 0.2-0.3%, increase CAD/GDP ratio by 0.3%, and lower overall GDP growth by 0.1%. The final impact on fiscal would depend upon the degree of discretionary fiscal adjustment encompassing both non-oil revenue and non-oil expenditure, Rao added.Iran started ramping up oil exports after western sanctions on it were lifted in January 2016. Since then, it has nearly doubled its daily crude shipments.India meets over 80% of its oil requirement through imports. Political compulsions of not passing on full increase in the global crude market to fuel retailers could complicate government’s macroeconomic challenges.The government has deregulated retail pricing of petrol and diesel. But since the campaign for Karnataka assembly elections started, state-owned oil marketing companies (OMCs) have apparently been going slow on price hike to shield the ruling BJP from potential electoral backlash.Crude prices have crossed $70/bbl level, touching a four-year high. Bullish investors have increased their wagers on crude oil rally, ignoring the risk of US shale production causing oversupply in the market.Global oil prices had started their downward journey in July 2014. The Modi government, which came to power in May that year, took advantage of low oil prices to increase the tax on auto fuels to fill its coffers rather than pass on the benefit to consumers.Finance minister Arun Jaitley raised excise duty nine times between November 2014 and January 2016.Now if the government does not scale back duty hikes on auto fuels, consumers could feel price shock as OMCs cannot absorb under-recovery beyond a point. But government’s fiscal position is already precarious and it cannot afford to lose out on revenues.So, it is obvious that the government is facing a stark choice between shielding consumers against oil price shock and avoiding a fiscal slippage.
