Falling Oil Prices Can Provide a Tailwind for India’s Twin Deficits

India’s economic framework is closely linked to global markets, primarily because the country relies heavily on crude oil imports, which account for over 80% of its total consumption.

The recent decline in global crude oil prices presents a significant macroeconomic opportunity for India, especially regarding its twin challenges: the current account deficit and the fiscal deficit.

Falling oil prices can positively impact India’s current account balance by lowering the import bill. Being a major oil importer, a decrease of $10 per barrel in crude prices could save India roughly $13 billion annually, as per analysts at BofA Securities. This financial relief equates to about 0.3% of the country’s GDP, leading to a noteworthy reduction in the current account deficit.

Moreover, the decrease in energy import costs enhances India’s external financial position, strengthens its balance of payments, and boosts foreign exchange reserves. The Reserve Bank of India has already accumulated around $67 billion in additional reserves in 2024.

The Indian government stands to gain from the drop in oil prices as well. Historically, when oil prices fall, the government has the option to either reduce fuel prices for consumers or retain the savings to increase fiscal revenues.

In recent years, India has strategically opted to absorb some of these savings to minimize its fiscal deficit. The financial benefits from lower oil prices could provide the government with more flexibility for public spending or accelerate efforts to reduce debt.

Additionally, lower oil prices could help alleviate inflationary pressures in the Indian economy. Given that fuel significantly influences India’s Consumer Price Index, a decrease in retail fuel prices could have both direct and indirect effects on inflation.

The immediate reduction in fuel costs could lower inflation by about 29 basis points over time, which may also affect consumer expectations and spending habits.