Crude Slide can Benefit India

After strengthening in early February, crude oil prices globally have corrected quite a bit with renewed uncertainty on global economic growth. Automatic spending cuts in the US, weak economic data in China and the Eurozone unemployment hitting a record high -- all contributed to this worry. Amidst this gloomy picture, the drop in crude oil prices is a significant positive for India, provided this trend continues. Brent crude oil prices – the most widely followed pricing benchmark – lost over 7.5% over the last three weeks to drop below $110 after touching a high of $119.2 in early February. This is the lowest level in 2013 so far due to concerns relating to oil demand amid a sluggish global economic growth.
A failure to strike a deal between US lawmakers triggered automatic spending cuts starting March 1, 2013, known as sequestration. The cuts estimated at $85 billion for the remaining months of the current year, are estimated to trim US government spending by $1.2 trillion over 9 years. This is a significant cut for the US and is going to shave off at least 0.5% from its economic growth, according to IMF estimates.
While the world’s largest economy is facing the prospects of a slower growth, the second biggest economy of China too could be heading towards a slowdown. The recent official Purchasing Managers' Index reading came at 50.1, much lower than expectations, and barely above the 50 mark, which denotes economic expansion. Similarly, the recently released data for Eurozone showed that the steadily growing unemployment crossed a record high of 11.9% for January 2013.
The fall in crude oil prices is a boon for India, which imports more than threefourths of its hydrocarbon needs. The rupee cost of the Indian crude oil basket has dropped a steep 6.1% in last 10 trading sessions to . 5,830 per barrel on February 28.
Of course, it is necessary for prices to continue the downtrend for the country to derive any meaningful benefit. The overall under-recovery for IndianOil, BPCL and HPCL put together stands at . 432 crore per day starting March 1, marginally down from . 454 crore per day of the preceding fortnight. For the country, which has lost nearly . 1.25 lakh crore on petroleum under-recoveries in the first nine months of the current fiscal, these numbers are still frighteningly high.