When usual dynamics deceive

DEFICIT IS MARGINALLY WIDER THAN LAST YEAR AND NARROWING OF INDIA'S IMPORT BILL IS UNDERWHELMING

- ANUBHUTI SAHAY

LOWER CRUDE OIL prices are perceived to be positive for India's external balances as it reduces the oil import bill, boosts net USD inflows, and bolsters foreign exchange reserves.

Economists estimate the oil import bill's sensitivity to changes in crude oil prices at 1.4-1.5 ceteris paribus. That is, every $1/bbl (barrel of oil) fall in crude oil prices reduces the import bill by $1.4-1.5 billion a year.

This simple sensitivity analysis relies heavily on the central assumption of ceteris paribus (other things being constant). But in the real world, things hardly stay constant. And thus, sensitivities change or play out only partially.

Let's take India's gross oil import bill and oil deficit (netted for exports) in April-October versus the year-ago period. Average crude oil prices were lower by $12/bbl. Ideally, this should have narrowed the import bill and trade deficit by $10 billion assuming the above-mentioned sensitivity. But that has not been the case. In fact, the oil deficit was marginally wider than last year, and the extent of narrowing in the oil import bill was underwhelming.

This is because another dynamic came into play—lower prices led to higher demand. And, in fact, the rise in imported volumes of oil negated the 50-55% impact of the fall in crude oil prices. A sharp increase in imported volumes due to lower oil prices was seen in 2015 and 2016 too (crude oil prices averaged around $45-50/bbl then).