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Oil Price Shock to Widen India’s CAD, Push Inflation Higher: Santosh Mehrotra

Economist Santosh Mehrotra warns that the ongoing US-Iran war will widen India's current account deficit by 0.3% of GDP for every USD 10 rise in oil prices. He expects inflation to rise further, criticizing government action on fuel and gold as "too little, too late." The disruption of the Strait of Hormuz is impacting oil, gas, fertiliser, and helium supplies, hurting industries like restaurants. Mehrotra also highlights rupee depreciation as an additional inflationary trigger, with oil prices potentially reaching USD 150 if the conflict continues.

Key Points: Oil Price Shock to Widen India’s CAD, Push Inflation Higher

  • Oil price shock to widen current account deficit by 0.3% per $10 rise
  • Inflation expected to rise, government action "too little, too late"
  • Strait of Hormuz disruption hits oil, gas, fertiliser supplies
  • Rupee depreciation from 90 to 96 per dollar adds inflationary pressure
3 min read

Oil price shock to widen current account deficit, push inflation higher as US-Iran war continues, says economist Santosh Mehrotra

Economist Santosh Mehrotra warns US-Iran war will widen India's current account deficit by 0.3% per $10 oil rise, push inflation, and strain household budgets.

"For every USD 10 increase in the international price of oil, it increases our current account deficit by about 0.3 per cent of GDP - Santosh Mehrotra"

New Delhi, May 16

With no sign of the US-Iran war ending and global oil prices likely to reach record highs within a quarter, Santosh Mehrotra, former Economic Advisor to the United Nations, warned that India's current account deficit could widen by 0.3 per cent of GDP for every USD 10 rise in oil prices. He expected inflation to rise further as government action on fuel and gold comes "too little, too late," while geopolitical risks and supply disruptions keep pressure on the rupee and household budgets.

Mehrotra explained the direct transmission of oil prices to India's economy, "For every USD 10 increase in the international price of oil, it increases our current account deficit by about 0.3 per cent of GDP. And simultaneously, that same USD 10 impact on the consumer price index is about roughly the same." He said the downward revision to GDP and upward revision to CPI have already been made, but these are based on the "current situation" and do not account for a prolonged conflict.

The biggest near-term risk, he said, is the disruption to oil, gas, fertiliser, and helium supplies due to the closure of the Strait of Hormuz. "All this is already having an impact on the lives of ordinary people," he noted, pointing to shortages of industrial LPG that have hit ceramics and restaurants. "There has been a significant decline in the number of jobs in the restaurant industry because LPG has simply not been sufficiently available."

Mehrotra was critical of the government's recent diesel price hike, arguing it will worsen inflation across the board. "Diesel is an input into transportation costs... that will simply get absorbed by the truckers, but it will finally get passed on to the consumer." He said that the government had a "windfall gain of roughly 25 to 30 lakh crores" over the last decade when oil prices averaged USD 50-60 per barrel, but fiscal strain persists due to "poor economic policies."

He also highlighted the rupee's depreciation, from "under 90 rupees to about 95 plus, nearly 96 to a dollar" in the last three months, as another inflationary trigger. "When the rupee falls against the dollar, inevitably you'll have a situation where the RBI steps in... now the RBI has stopped doing that."

Mehrotra believes oil prices could easily touch USD 150 if the war continues, with spot prices for India already near USD 140. He added that Iran is "clearly winning the war" and unlikely to concede on sanctions or uranium enrichment, meaning "the rest of the world will continue to pay the price for the behaviour of Israel on the one hand and the United States on the other."

- ANI

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Reader Comments

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Priya S
Very insightful analysis by Mehrotra ji. The 0.3% CAD impact per $10 oil price rise is alarming. But what frustrates me is that we had 7-8 years of low oil prices and government didn't build enough strategic reserves or invest in alternative energy seriously. Now we're paying the price.
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David E
As someone living in the US, I can see both sides. But this conflict is hurting ordinary Indians way more than it should. The Strait of Hormuz disruption is a global problem, but India's dependence on imports makes it uniquely vulnerable. Time for serious energy diversification, not just blame games.
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Vikram M
The real kicker is that rupee depreciation AND oil price rise happening simultaneously. Our import bill is going to skyrocket. And Mehrotra is right about the government's windfall - 25-30 lakh crore in low oil price era and still fiscal deficit issues? That's just poor economic management, plain and simple.
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Rohit P
I work in logistics and let me tell you, the diesel price hike has already affected truckers. My company had to increase freight rates by 8% this month alone. Ultimately the aam aadmi will pay more for everything - from vegetables to cement. 😔
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Sarah B
Interesting how Mehrotra says Iran is "clearly winning" the war. That's a perspective you don't hear much in Western media. But regardless of who's winning, ordinary Indians are losing. The government needs to put politics aside and focus on protecting household budgets and small businesses.

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