Big hit on India: ‘Higher oil, food prices; duty rollback may help’

Amid the continuing invasion of Ukraine by Russia, a sustained rise in oil and meals costs would adversely have an effect on Asia’s economies by way of greater inflation, weaker present account and monetary balances, and a stress on financial development. India, Thailand and the Philippines are being seen as the largest losers, whereas Indonesia can be a relative beneficiary, Nomura stated in a report Friday.

Meanwhile, in a separate report, Icra stated influence of excise responsibility lower on CPI inflation can be muted if such charges are rolled again to pre-pandemic ranges, including {that a} discount in excise responsibility on motor spirit and high-speed diesel to pre-pandemic charges would entail a complete income loss to the Centre of Rs 920 billion in FY2023.

For each 10 proportion factors enhance in oil costs, retail inflation of India is predicted to rise by 0.4 proportion factors and GDP development is predicted to be diminished by 0.2 proportion factors, Nomura stated. “The negative impact on Asia is predominantly because most economies are net oil importers, and food and energy accounts for nearly half of the consumption expenditure in EM Asia… we see higher inflation as a bigger risk in Thailand (food and energy accounts for 52.7% of total CPI), India (45.9%) and the Philippines (43.4%).”

“Higher oil prices add to freight/transportation costs and higher gas/coal prices add to the utility bill. Relative to oil, the spillover from higher global food prices to local food prices should be more benign, because economies with high food weightings in their CPI baskets are net exporters (Thailand, India) and also due to better food supply and price controls in many economies,” it added.

Most Asian customers haven’t but totally recovered from the pandemic and have decrease financial savings, so greater inflation can squeeze actual disposable incomes and weaken the incipient consumption restoration. “The impact could fall disproportionately on lower income households since food demand tends to be inelastic. We also see risk to corporate profit margins, as the entire input cost burden is unlikely to be passed on to consumers. For a 10% oil price rise, GDP growth could be 0.2pp weaker in India and 0.1pp lower in the Philippines and Thailand,” Nomura’s report stated.

Icra stated a rollback in excise duties on gas to pre-Covid ranges can forestall a significant rise in pump costs, thereby softening the influence on the CPI inflation trajectory, albeit at a price of Rs 0.9 trillion. “If the Centre reinstates the excise duty on MS and HSD to pre-pandemic rates of Rs 19.9/litre and Rs 15.8/litre, respectively, before April 1, followed by the budgeted rise of Rs 2/litre each on unblended fuel in H2 FY2023, we estimate the cess collections in FY2023 at Rs 2.4 trillion, around 27.5% lower than the BE of Rs. 3.35 trillion,” it stated.