A virtuous cycle in the economy
From the limited perspective of India's consumer economy, lower global oil prices undoubtedly augur well. Lower pump prices reduce pressure on the consumer who can spend the savings elsewhere, spurring the demand side of the economy. As petroleum products form a large part of the consumer price indices, lower crude prices result in reduced inflation, which in turn paves the way for lower interest rates and greater buoyancy in investments. Thus, lower oil prices can trigger a virtuous cycle in the Indian economy. After all, with India's imports running at an estimated 3.7 mbpd in 2013, a $30/barrel decline in oil prices amounts to a $40 billion savings bonanza on annual imports. The impact would be best felt on the petroleum sector where marketers have been groaning under subsidy burden. The transport sector would also be a direct beneficiary.
If we widen the impact analysis to consider the totality of the Indian economy, some challenges also appear. First, as oil producers are India's major markets and investment destinations, their economic decline may affect the country. Recent decline in the share prices of Bharti Airtel and Bajaj Auto due to the devaluation of the Nigerian Naira illustrates this more complex trend.
Second, apart from being the fourth largest oil importer, India is also the world's sixth largest petroleum product exporter earning over $60 billion annually — nearly a fifth of global exports. A bearish oil market would hurt this segment with reduced demand, lower unit prices and lower margins.
Third, the oil price decline coincides with resumed foreign interest in investing in India. It is difficult to assess their mutual correlation, but lower oil revenues may attenuate arrival of petrodollars into India.
Fourth, whenever oil revenues decline, countries that export Gulf oil try to tighten their belts by emphasising local production and downsizing their foreign labour force in which Indians dominate. Thanks largely to over five million Indian expatiates there, India was the world's largest recipient of remittances which topped $70 billion in 2013. The possibility of these remittances being reduced cannot be ruled out. This would have a serious impact on remittance-dependent States such as Kerala and Goa.
Fifth, lower crude prices may cast a shadow over the sputtering controversy over natural gas pricing norms in India as the latter generally follow the oil prices. Future investment decisions in oil-related sectors may get delayed.
Sixth, lower pump prices may cause higher fuel consumption as sales of automotive products soar. This would worsen commuter woes as well as cause increased urban pollution.
Finally, a decline in oil prices generally accompanies a global decline in commodity prices, particularly those of minerals and agricultural products. India remains a major exporter of these and would see lower realisation, particularly of Guar Gum, a critical input for the shale industry.
The long-term impact of lower oil prices is likely to be felt beyond the economic domain. Geopolitically, persistent lower oil revenue could propel a number of emerging exporters towards domestic political instability as the ruling elites lose their capacity to provide "stomach infrastructure" to the common man. Countries with lower per capita oil revenue such as Nigeria, Iran, Algeria and Venezuela may be more at risk. In general, however, lower oil revenues may have a dampening effect on regional or domestic disputes.