Recently Trump administration decided to do away with relaxation to major importers of Iran’s oil resource. US govt. has decided to be more proactive and want more imposition of sanctions on Iran to derail Iranian economy and eventually dis courage nuclear activity and funding to terrorist groups. This step is going to affect India as :
- India is major importer of oil from Iran. About 10% of oil import is from Iran.
- It will increase pressure on Fiscal deficit and current account deficit.
- Pressure on rupee dollar exchange rate.
- Commodity price increase.
- Reduction in disposable income of consumer.
- Spillover effect on monetary policy, consumption and investment
- As a rule of the thumb, an increase of $10 per barrel in crude prices will lead to an increase of about Rs17,000 crore (or $2.5 billion at an exchange rate of 67/$) in fuel subsidies, equivalent to 0.09% of GDP.
- High oil prices will force government to cut taxes to ensure the oil cost is bearable. It means revenue loss. a cut of Re1 in excise duty for both petrol and diesel will lead to an annual revenue loss of Rs12,000-13,000 crore (or 0.065% of GDP).