NEW DELHI: The US refusal to extend sanction waiver on Iran oil sales will make life harder for consumers in India by pushing up fuel prices and squeezing the new government’s legroom for social spending.
The on Monday said it would not extend the temporary waiver that allowed India and seven other countries to buy for six months after Washington formally reimposed sanctions in November 2018. The waiver was up for renewal on May 2.
Government officials said they were “studying the implications of the announcement and the government will make a statement at an appropriate time.”
India depends on imports for 82% of its oil needs and Iran is among its top-five suppliers. But ranking executives of state-run oil companies, the main importers of Iranian oil, told TOI there was no concern over supply shortage as alternative sources of have been identified.
They said Indian refiners have lined up ‘optional volumes’ – quantities in addition to term contract volumes – from Saudi Arabia, Kuwait, Mexico and the US to substitute shipments from Iran, which supplied over 23 million tonne in 2018-19.
It is on the pricing side that India will feel the pinch. Global benchmark spiked nearly 3% to $74/barrel on Monday, the highest since November 2018. Reports suggest the latest US move will suck out nearly 1 million barrels a day from the global market and help crude firm up further.
This is not good news for consumers and policymakers. Consumers have been gradually paying more for petrol and diesel – currently well above Rs 70 a litre – since oil prices started hardening as and Russia cut output and production in Venezuela and Libya faltered around Janaury.
Continued high oil price will upset the government math by pushing up India’s oil import and subsidy bills. This will put pressure on the current account deficit and the rupee, which in turn will bring back inflationary pressure and prompt RBI to press the pause button on interest rate cut.
Falling oil prices since 2014 had improved these macroeconomic indicators by helping India save billions of dollars in oil import and subsidy bills. This allowed the government to announce big-ticket social welfare programmes.
A 2014 report from Macquarie Capital Securities said a $10-per barrel fall in oil prices would reduce India’s import bill and the current account deficit by $9.2 billion (0.43% of the then GDP). The reverse could mean a painful start for the new government.