hello and welcome to this special
episode of finance Ke Funde
today's episode we'll be talking about
the impact of crude oil on indian
economy
we will focus on four major areas impact
on trade deficit
impact on inflation impact and fiscal
deficit and impact on stock prices
but before we get there let's begin with
the uses of crude oil and why crude oil
is so important for us to consume
crude oil is the most important energy
source
used globally several industries rely
heavily
on fuel for example airlines plastic
product manufacturers
agricultural businesses so on and so
forth eighty percent
of our requirements of oil are fulfilled
through
imports let us see the journey of oil
prices
from international markets to our local
petrol pumps
at the time of recording of this video
crude oil was trading at around 46
dollars per barrel
when we import this oil into india we
have to convert this rate into indian
rupees as we are paying dollars
the prevalent rate at this point of time
is 73
rupees per dollar which implies that
cost of oil
for us becomes 46 multiplied by 73 that
is
3358 rupees per barrel
this raw oil is further processed and
finally
per liter base price for a oil marketing
company comes to
24.95 rupees per liter
add to that a freight of 36 pesa and the
cost to dealer comes to around 25.31
pesa
government charges excise on this which
amounts to 32.98 rupees
at the dealer's commission at 3.69 vat
at 18.59 and final retail
price at the petrol pump closest to us
comes to 80.57
this data is taken from indian oil
corporation
website and pertains to august 2020
let us begin with impact of crude oil
prices on trade deficit
in a situation where imports are more
than the exports trade deficit
can be understood as the difference
between
total imports and total exports
according to united nations
country database on international trade
mineral fuels
oils and distillation products comprise
of 32 percent of india's imports
since oil and related products comprise
of almost a third of total imports
any increase in total quantity demanded
rate per barrel or inr dollar exchange
rate
directly increases trade deficit high
imports
also impact the exchange rate since
the payment is usually made in dollars
second we'll discuss the impact on
inflation crude oil is a basic raw
material
for several businesses for those where
it is not used as a raw material
it definitely is used to transport the
goods from the factory
to the market hence directly or
indirectly
every good is impacted by the cost of
oil
if the oil prices go up the total
production cost goes up
thereby either declining the profits of
the company producing them
or by casting additional burden on the
consumers
purchasing them this leads to inflation
higher inflation
leads to an increase in the interest
rate increasing
the total cost of borrowing for the
companies leading to
a further fall in profits third
impact on fiscal deficit 40
of the retained sales price of petrol
goes towards excise
which forms a part of government
revenues if
the price of crude international market
goes up the cost
of importing goes up significantly in
such cases
to ensure that the crude oil or its
derivatives
are still affordable to the common
public government may
have to provide a subsidy by reducing
this excise duty
a reduction in excise duty translates to
a fall in the revenue for the government
which increases the fiscal deficit
high fiscal deficit may lead to d rating
of the country in international markets
causing an increase in cost of funding
for both the government as well as
indian corporates
similarly if the price of crude goes on
an international market
allowing import of crude at cheaper
rates
government may get an opportunity to
increase the taxes
providing a temporary cushion to its
revenues hence
the direction of crude oil prices in
international markets
directly impacts the fiscal policy
decisions
fourth and last point impact on stock
prices in situations
where the base price of patrol goes up
all marketing companies
may have to take a hit on their profits
in order to continue to service the
demands of indian consumers
as the profitability of the company
takes a temporary hit
the prices of the stocks may also go
down similarly
when the raw material cost goes up or
transportation cost goes up
profitability of other companies may
also go down
causing a fall in the share prices in a
river scenario
where crude oil prices go down
profitability increases
and so does share prices in this video
we discussed four important concepts
impact on trade deficit through higher
imports impact on inflation through
higher costs
impact on fiscal deficit through volume
revenue
and impact on stock prices because of
profitability
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bye
