Falling oil prices may provide a tailwind for India’s twin deficits by Investing.com

Investing.com — India’s economic landscape is deeply intertwined with global markets due to its heavy reliance on crude oil imports, accounting for more than 80% of total crude oil consumption.

The recent decline in global prices has emerged as a macroeconomic opportunity for India, particularly in addressing its twin deficits: the current account deficit and the fiscal deficit.

Falling oil prices can directly impact India’s current account balance by reducing the country’s import bills. As a major oil importer, every $10 per barrel drop in crude oil prices could save India around $13 billion annually, analysts at BofA Securities said in a note.

This represents about 0.3% of GDP, a substantial reduction in the current account deficit.

BofA added that the low cost of energy imports is improving India’s external finances, strengthening the balance of payments and increasing foreign reserves, with the Reserve Bank of India already accumulating about $67 billion in additional reserves in 2024.

Government of India will also benefit from reduction in oil price. Historically, when oil prices have fallen, the government has had the option of either passing the savings on to consumers by lowering fuel prices, or retaining the gains to boost tax revenue.

In recent years, India has strategically absorbed some of these advantages to reduce its fiscal deficit. Fiscal savings from falling oil prices could give the government more room for public spending or accelerating debt reduction efforts, BofA said.

Besides improving fiscal values, low oil prices could help ease inflationary pressures in the Indian economy. Fuel has a significant weight in the Consumer Price Index of India and a fall in retail fuel prices could have a direct and indirect impact on reducing inflation.

Direct reductions in fuel costs could reduce inflation by about 29 basis points over time, which in turn could influence consumer expectations and spending behavior.