The government’s projection of 8-8.5% growth in 2022-2023 is based on a few assumptions of the future global and national scenario. On the home front, it is assumed that there would be no more economic disruptions due to the resumption of the pandemic and that there would be a normal monsoon this year. As for the external environment, the withdrawal of global liquidity is expected to proceed in an orderly fashion while the disruptions in the international supply chain ease in the near term. These assumptions may turn out to be correct and could rightly be used as a backdrop for projecting next year’s growth results.
The fifth assumption, however, is that oil prices would remain around $70-75 a barrel in the next fiscal year. This is an expectation about which there is considerable doubt, at least in the short term. Oil prices have already climbed as high as $89 a barrel and experts predict they could climb as high as $125 in the coming months.
The current scenario of soaring prices emerged as a result of the cartel of oil exporters, with OPEC joining Russia and its allies in recent years. This collaboration known as OPEC plus took place to curb the weakening of prices due to the sudden increase in oil production in the United States from shale oil fields. Alarmed by this trend, OPEC and Russia jointly decided to cut production in a bid to drive up prices. The strategy proved successful, but the outbreak of the Covid pandemic led to a sharp drop in oil demand in 2020.
Prices began to harden again in January 2021 as global economies began to return to normal, leading to a recovery in oil demand. OPEC Plus then decided on a gradual ramp-up in production from September at the rate of 4,00,000 barrels per day. It should be remembered that it was a question of gradually reversing the huge reduction of around 10 million barrels per day carried out in April 2020 by the cartel with the aim of driving up prices. In recent months, however, demand has increased rapidly as the pandemic has waned in many parts of the world. This has led to the recent price spike.
High oil prices concern not only India, which imports more than 80% of its consumption, but also the United States and the European Union, which are large consumers of fuel. US President Joe Biden initially appealed to OPEC Plus to increase production to meet demand and cool prices. There was little positive response to the call. It then embarked on a strategy last month in cooperation with other major oil importers to release oil stocks from strategic reserves. The United States released stocks last month, followed by India and Japan. China and South Korea have also agreed to release some of their reserve stocks.
The strategy has so far not had much impact on the cartel which relentlessly adheres to the previous policy of increasing production by just 4,00,000 barrels per day. The situation has been aggravated by recent geopolitical tensions. Russia has massed its troops on Ukraine’s border, prompting the United States to warn of serious consequences should it decide on an invasion. Since Russia supplies about 30% of Europe’s oil and gas needs, the situation has become even more complex.
The net result was further tightening in oil prices, leading to prices hitting seven-year highs of $91 a barrel just days ago. A study by the Dutch financial services agency, Rabobank, estimated that in the event of a conflict between Russia and Ukraine, oil prices could rise to as high as $125 a barrel.
In other words, the oil markets are in a volatile situation right now. For this country, the import bill has already exploded in 2021-22 and is expected to cross $112 billion from only around $100 billion in the pandemic year 2020-21. The concern is that in the event of a surge in world prices, the import bill will increase sharply and lead to a widening of the current account deficit. Fortunately, the country has significant foreign exchange reserves estimated at 634 billion dollars. But it would not be desirable to have a levy on them simply to meet the cost of oil imports.
Thus, the major assumption made during the preparation of the budget, namely that world oil prices would be contained at the level of 70 to 75 dollars per barrel, may not materialize in the short term. The geopolitical scenario is actually deteriorating as the United States has decided to send around 3,000 troops to Eastern Europe in anticipation of any conflict in the region. In addition, a winter storm is forecast for the central United States over the next few days, which will increase gas demand. One factor that could possibly cool markets over the next few months is a positive outcome of talks on Iran’s nuclear program with the United States. This would lead to more Iranian crude entering the market.
In any case, the global scenario is currently full of uncertainties, not only on the oil front but also on the evolution of the Covid pandemic. A new variant may still be on the horizon although experts maintain the mutations are likely to be more benign than not. In this context, we cannot blame the finalists for the 2022-23 budget for having had to make certain assumptions. The only caveat is that the country should be prepared for a few hiccups on the path to higher growth due to an unstable external environment.