December 18, 2014

Impact of falling crude oil prices on Indian Economy

Indias key economic variables as well as markets
are intricately and inversely tied to crude oil
prices. India has the highest oil import share in
total imports (34%) in the world, making it one of
the most affected countries to oil price shocks.
The oil import bill has gone up 6 fold in the last 10
years and has been one of the key factors behind
the deterioration in several macro variables such
as current account balance, fiscal balance and
inflation. Much as India has been at the receiving
end for the last several years on account of oil
and broader commodity basket price inflation,
India is now poised to be one of the leading
beneficiaries on account of fall in prices of these
commodities. The benefit for India is likely to be
felt across many categories in the form of: lower
Inflation, better fiscal balance, smaller current
account deficit, lower policy rates and benefits for
several sectors. We have explored this in greater
detail below.

Crude oil prices impacts Indian economy through

multiple channels: (1) Inflation (2) Import Bills and
remittances from Indian workers who work in oil
exporting nations and hence overall current
account balance (3) Input costs of corporates and
hence business investment (4) Fiscal balance as
both centre and states collect taxes from
petroleum products and centre subsidizes the
under-recoveries of Oil Marketing Companies
(OMC).

Led by hopes of an increase in supply of alternate

sources of energy as well as prospects of
weakness in the global economy, international
crude oil prices have been on the decline over the
past several months. By November, the monthly
average cost for the crude barrel imported into
India came down to USD 77.58, a near 27%
decline on annual basis.
Chart 1. Indian crude basket since 2002

India imports nearly 2.7 million barrels of crude

oil and related products per day (net import). So
USD 1/bbl fall in crude would lead to an
approximate saving of USD 1 billion per annum.
Since oil-marketing companies often enter into an
advance contract with global oil-exporting
partners, the impact of crude price changes on
import bill is usually seen with a lag of 2-3
months. We see USD 20bn fall in crude import
bills for 2014-15 and additional USD 14bn fall in
2015-16 (chart below). Given that 4 quarter
rolling sum of CAD stands at USD 23.4bn as of Q2
2014-15, the crude price at USD 70/bbl has the
potential to take Indias current account to
surplus, everything else staying put.

140

100
80
60
40
20
0
-20
-40
-60
-80

120
100
80

60
40

20

Apr-14

Aug-13

Apr-12

Dec-12

Aug-11

Apr-10

Dec-10

Aug-09

Apr-08

Dec-08

Aug-07

Apr-06

Dec-06

Aug-05

Apr-04

Dec-04

Aug-03

Apr-02

Dec-02

Current account balance

Weakness in crude price augurs well for Indias
current account balance (CAD), which imports
more than 75% of its crude oil requirement.
Crude oil and petroleum products make up nearly
34% of Indias import bill. With oil being a
relatively price inelastic commodity of the import
basket, fall in crude price has nearly one-on-one
impact on Indias import bill.

Crude Oil Price Indian Basket (Average Price, USD/bbl)

Crude Oil Price Indian Basket (% y-o-y)- RHS

Source: PPAC, SBIFM Research

Chart 2. Net Crude and Petroleum products

import (in USD bn)
120
110
100
90
80
70
60
50
40

99.0

103.4

102.8
82.1
67.8

2011-12

2012-13

Inflation
Lower oil prices moderates inflation directly by
lowering diesel and petrol prices and then
indirectly by reducing the input costs which has a
second-round impact of fall in prices of other
consumer goods and services.

2013-14

2014-15E

2015-16E

Net Crude and Petrooleum products Import (USD bn)

Crude Oil Price Indian Basket (Average Price, USD/bbl)

Source: CMIE, SBIFM Research; NB: Crude price kept at USD

70/bbl for 2015-16

Nevertheless, we still see Indias current account

balance in the negative quadrant. Gold and nonoil non-gold imports are likely to rise. Further,
reduced oil prices have the potential to reduce
remittances receipts from Indian workers in the
oil-exporting nations (see chart below), thereby
deteriorating the invisible component of the
current account balance. Additionally, rapid
decline in crude prices are indicative of slump in
global demand which is likely to hit Indian exports
going forward.
Chart 3. Crude Prices vs. Remittances to India

Given the higher share of tradable goods in

wholesale price Index, the impact of lower crude
prices is much higher on WPI Inflation than CPI
Inflation. Lower oil prices directly impacts 8.6% of
the WPI basket and additionally 5% indirectly
through lower price of crude derivatives such as
chemicals. On the other hand, the crude related
items account for nearly 6% weight in CPI basket.
Impact of crude prices on inflation in India also
depends on the government policy. While the
crude price has fallen nearly 30% since June 2014,
petrol and diesel prices have only fallen by 11%
and 8% respectively during the same period. This
is due to offsetting impact of increased taxes on
diesel and petrol by the government. Moreover,
the other components of CPI such as LPG at 3.1%
weight in CPI basket and kerosene (PDS and
others) at 0.9% are still at government
administered prices and their future trajectory
again depends on government policy.
Chart 4. Petrol and Diesel prices since April 2014

Source: CMIE, RBI, SBIFM Research

Source: PPAC, SBIFM Research; NB: Prices has been taken as
average prices in key Indian cities

Chart 5: Falling petrol and diesel prices has

contributed to CPI disinflation

Chart 6. Government's excise collection from

diesel and gasoline set to rise

Source: MOPNG, Kotak Institutional Equities estimates

Source: CSO, SBIFM Research; NB: Petrol and diesel has
22.5% share in CPI: transport and communication index

Very broadly, if everything else remains the same,

a 10% decline in crude prices should translate into
a 20 bps direct impact on CPI inflation. There
could be some indirect impact also on food prices
as diesel is a meaningful component of farm input
prices (irrigation and tractors) and freight rates.
Fiscal Account
Lower crude prices increases the marketing
margins of OMCs which gives additional space to
government to raise the excise duties on
petroleum products. Very recently (in December),
the government increased excise duties on diesel
and gasoline (Rs. 2.5/litre and Rs. 3.75/litre
respectively), which is expected to generate
additional tax revenue of Rs. 320 bn on
annualized basis.

Further, oil subsidies will decline. Every US$10/bbl

drop in crude oil price is likely to result in about
Rs. 100 bn of lower under-recoveries. Assuming a
simple 50-50% share between the government
and the oil companies, the governments share of
oil subsidy could drop to Rs. 150 bn at US$60/bbl
(vs. Rs.440 bn estimated previously assuming the
same 50-50 sharing model). Further, with diesel
being completely deregulated since Nov 2014,
total diesel subsidy (oil companies and
government combined) is expected to fall by
Rs.520bn in 2014-15 and completely wipe out
from next financial year. The expected launch of
modified Direct Benefit Transfer of LPG or DBTL
scheme from January 2015 (on nation-wide basis)
is also expected to lower LPG subsidy bill going
forward (chart below). The following table shows
the range of subsidy under different currency and
oil price assumptions.
Oil Subsidy in Rs. bn
Brent US$/bbl

Rs/
$

6
0
6
2
6
4

40
84
97
11
0

50
18
0
19
6
21
2

60
27
6
29
5
31
4

70
37
1
39
4
41
6

80
46
7
49
3
51
8

90
56
3
59
2
62
0

90
65
9
69
1
72
2

Source: PPAC, Companies, SBIMF Research

Chart 7: Oil subsidy by Government and Oil

marketing companies (Rs. In Billion)

can direct the subsidy amount towards ramping

up capital expenditure and the central bank gets
further comfort to reduce policy rate).

LPG

Kerosene

Diesel

FY2017E

FY2016E

FY2015E

FY2014

FY2013

FY2012

FY2011

FY2010

FY2009

FY2008

FY2007

FY2006

1,800
1,600
1,400
1,200
1,000
800
600
400
200
0

Petrol

Source: PPAC, Companies, SBIFM Research

Falling crude prices also pulls down the cost of

naphtha which is used as an input for urea,
thereby lowering the fertilizer subsidy as well.
From 2015-16 onwards, the oil and fertilizer
subsidy (which makes for 50% of government
subsidy) looks set to reduce drastically.
The contained subsidy bill opens fiscal headroom
to rev up expenditure in more productive
channels. A point to note here however is that
state government revenues may get marginally
impacted as sales tax that the states levy on
petroleum products is directly linked to the price
of oil. A rough estimate of this negative impact
would be in the range of around Rs. 250 bn on an
annualized basis.

Currency and Rates

Lower crude oil import bill coupled with lower
inflation should lead to improvement in the
fundamental value of the rupee. However, as
mentioned earlier, we still expect current account
balance to be in the negative quadrant on
account of lower export growth, higher gold
imports and lower remittances from Indian
workers in the oil exporting nations. In an
environment of strong Dollar globally and RBIs
intention of building up Forex reserves, rupee is
likely to remain under pressure. Hence, while
Indian rupee is likely to outperform most other
emerging market currencies, we maintain our
view that it is likely to depreciate marginally
against the US Dollar and hover in 62-65 range in
this financial year. We have earlier sent out a
separate detailed note on currency.
The benefit of lowered crude prices felt in
inflation and fiscal account will further bolster
RBIs confidence in delivering a policy rate-cut
early next year.

GDP growth
Lower oil prices should also provide a positive
impetus to growth as lower inflation typically
increases real disposable income in the hands of
households thereby pushing the consumer
spending as well as savings.
Further improvement in macro fundamentals like
lower CAD and fiscal deficit and moderate
inflation increases the macro space for fiscal and
monetary policy to boost growth (government
4

Implications of lower crude oil prices on various industries

Oil and Gas

There are multiple beneficiaries of the reduction in the subsidy, the government, the oil
marketing firms and the upstream firms.
The petroleum value chain would witness
Exploration : Companies with sizeable exposure to exploration activity would be affected in
terms of lower prices and profitability. Any benefit to these upstream firms is contingent on
the government revising the subsidy sharing mechanism.
Refining: short term inventory losses due to MTM inventory, although in the medium term
benefits of reduction of working capital. GRMs would depend on refining capacity
addition/utilizations.
Petrochem: Marginal inventory losses. Product spreads will be more driven by Petrochem
capacity addition/utilizations.
Oil lubricants: Being consumer facing, in this case lower base oil prices would help margins
expansion subject to rational competition.
Offshore services: Falling crude rates can result in cut in capex. Daily rates for offshore rig to
come under pressure on account of lower demand and large supply headwinds. Also
segments directly linked with oil capex like seamless tubes would come under pressure.
Consumer
We expect the sector to benefit significantly in consumer discretionary spending on account
of lower oil prices.
For consumer companies the benefits are in the form of:
Savings in input cost: Inputs linked to crude as % of revenue for FMCG companies range
between 5% to 30%. EBITDA margin for the companies are in the range of 11% to 25%. A
10% fall in crude will result in EBITDA growth of 3% to 23% for our FMCG coverage. Paints,
home adhesives are the immediate beneficiaries.
Savings in freight cost: Freight as a % of revenue for FMCG companies is between 3 to 6%
and for. A 10% fall in crude will result in EBITDA growth of 2% to 6% for our FMCG coverage.
Again companies with high distribution centricity in their business models like biscuits, and
paints would be immediate beneficiaries here.
History suggests that in most cases these companies would increase their brand investments
or pass part of these benefits to consumer for enhancing market position. This should limit
the potential EBITDA improvement.
Industrials
A shift from oil subsidies to productive investments by the government is positive for the
industrial sector as a whole. They will also be a beneficiary of lower input costs and lower
interest rates.
Companies with direct market exposure to the infrastructure investments value chain
servicing the Middle East would be affected more
Diesel Genset players can benefit from the substitution opportunity due to fall in the fuel
costs.
Construction Construction companies that have exposure to Middle East markets in terms of the current
order book including oil & gas projects, buildings etc can get impacted in case of stress in
these markets.
Financial
We expect an increase in domestic savings (government, corporate and household) due to
fall in oil prices which will be beneficial for the financial services sector as a whole. Apart
Services
from this, decline in inflation and interest rates augur well for the banking system.
There could be slight negative impact of slower credit growth as banks lending to fund oil
imports would go down.
Improvement in asset quality should benefit CV financiers as the asset start being cash flow
5

Cement

Auto

Telecom

Airlines
IT

Media
Others

productive on account of cheaper fuel (15%+ of running costs for the user)
Direct benefit from lower freight costs which are almost 25-30% of the cost structure for
cement companies.
Marginal positive for lower mining costs where diesel is a primary fuel being used in
excavation activity.
Direct demand beneficiary of falling fuel price. Better consumer sentiment and lower
interest rates would further catalyse expansion of the opportunity here.
Tyre companies would benefit from lower raw material costs of crude derivatives and
synthetic rubber, which constitute ~30-40% of raw material costs.
Lower fuel prices should prompt use of less efficient vehicles (SUVs, sedans over
hatchbacks). However, historically there doesn't seem to be any direct correlation.
Cost of diesel comprises 4-5% of sales for Indian telecom operators, mainly to service the
tower infrastructure. Hence, EBITDA margin improves by 45 bps for every 10% fall in the
price of diesel while absolute EBITDA grows by ~1.5%.
Fuel costs are 40-50% of revenues and 40-50% of opex (excluding leases). Direct benefits to
the operators.
There is no first order impact of fall in crude price. Indirect flow through benefits possible in
travel expense (air fare) which amounts to 2.5-3% of sales, the pass-through of fall in crude
to actual air fare is not directly measureable.
There is no meaningful impact of fall in crude on broadcasters, newspapers or distribution
companies.
Companies that possess direct exposure, subsidiaries or operations to countries affected
adversely with fall in crude prices or witnessing sharp currency depreciations (like Russia,
Nigeria) would be affected adversely.

This presentation is for information purposes only and is not an offer to sell or a solicitation to buy any mutual fund
units/securities. These views alone are not sufficient and should not be used for the development or implementation of an
investment strategy. It should not be construed as investment advice to any party. In the preparation of this material, SBI
Funds Management Private Limited (the AMC) has used information that is publically available/information researched inhouse/ outsourced from various sources. Information gathered and material used in this document is believed to be from
reliable sources. The AMC however, does not warrant the accuracy, reasonableness and/or completeness of any
information All opinions and estimates included here constitute our view as of this date and are subject to change without
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professional advice

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