Oil Shock Hits India: PM-EAC Member Warns of One Year of Economic Pain | India Tonight | ET Now

Added: 2026-05-20

[00:00:01]Hello and welcome to a special discussion on India tonight with me Ankur Mishra. The ongoing West Asia conflict is now beginning to hit home in India. The country has seen its second fuel price hike in just 5 days as rising geopolitical tensions push global crude oil prices sharply higher and the impact is no longer limited to petrol pumps.

[00:00:24]Concerns are now growing over higher prices for everyday essentials from milk and vegetables to bread and other kitchen staples. India imports more than 85% of its crude needs making the economy vulnerable to global oil shocks.

[00:00:40]Analysts say that sustained rise in crude oil prices could add to inflationary pressures and strain household budgets and also it will weigh on consumption. So how severe could be the impact? Will businesses pass on higher transport and logistic costs to consumers? And does the government have enough room to absorb the shock if oil prices stay elevated for long? Joining us now to discuss the inflation risk and the broader economics is uh T. T. Ram Mohan, a part-time member PMEAC. Uh Mr. Ram Mohan, welcome to ET Now. You have decades of experience in tracking many crises but now that India is sustaining the kind of oil shocks which are there globally and now oil marketing companies have gone for second round of price hike. So I want to understand from you how do you read the scenario? On one hand the stock markets particularly has been on in the negative territory recently. Do you think markets are anticipating the problem in a correct manner or you think that more pain is still to come?

[00:02:01]Well, the markets are certainly anticipating events correctly. If anything, I would say that the risks are being somewhat understated in the markets, and particularly in the oil markets.

[00:02:14]Many of the oil analysts are a little surprised that the Brent crude price has been hovering around, you know, $110 per barrel.

[00:02:23]Most of the people looking at the supply-demand situation think that a more reasonable price would be something like $120 per barrel.

[00:02:34]And so I would say yes. I mean, the markets are pricing it you know, somewhat, you know, the markets are certainly right in anticipating the risk, but if anything, the risks are understated.

[00:02:49]Still, the risks are understated, and we read your article earlier in the May.

[00:02:54]You wrote clearly about how even the oil prices are not showing the reality. But, considering the event which is unfolding currently, today we have a statement saying that NATO may be tackling the Strait of Hormuz soon. So, overall, do you think the price which is there for crude oil currently is in the right direction, or you think still there is a pricing mismatch?

[00:03:23]Well, you know, let's suppose we accept that the present price level is correct.

[00:03:29]And the really substantive issue is whether the conflict is going to escalate or not.

[00:03:35]Because, you know, the US president had indicated has indicated that he had planned a fresh round of strikes for today, that is Tuesday.

[00:03:44]And it has been deferred to Thursday at the request of a few Gulf countries.

[00:03:49]So, if there is any escalation in the conflict, you can be pretty sure that oil prices are going to shoot up uh to anything above $120 $125 per barrel almost certainly.

[00:04:02]And so that is where that is the really a major cause for concern because the present level of oil price has been more or less factored uh into the uh markets.

[00:04:15]And so we have to wait and watch and everything hinges on, you know, how the conflict is going to uh pan out. But let me also add that even if the conflict were to be uh resolved tomorrow, whatever disruption has happened so far is going to play out for at least 1 year.

[00:04:33]And so uh there is no escaping pain whether the conflict escalates or not.

[00:04:38]Even if the conflict is called off uh very quickly, uh the the global economy, and not just India, will feel the impact uh for several months. And as I said, for at least 1 year.

[00:04:51]So you are saying that even if the conflict ends tomorrow, 1 year pain is most likely. And therefore, the next question I want to understand about the economy, how much of the impact you think it will have on India growth story?

[00:05:08]Well, I think uh the impact is already well understood. Uh most agencies are revising their inflation forecast uh from the current level of around uh three 3.4% was the April uh inflation level.

[00:05:24]Uh most analysts see inflation rising up to at least 5% at the current level of oil prices. They also see the growth forecast being revised downwards from last year's estimated growth of 7.5% in GDP to something like uh 6.5% or even lower.

[00:05:42]And I again I emphasize that is at the current level of oil prices.

[00:05:47]Uh so the impact is very much there.

[00:05:49]Although you could say that, you know, we are operating at a certain level of comfort at least in term both in terms of GDP and inflation.

[00:05:56]And therefore the scenario which uh, I've indicated just now, the combination of inflation and GDP is not extremely worrisome by historical standards.

[00:06:09]All right. Uh, so not worrisome by historical standards, but currently we have seen that Prime Minister coming out and urging the citizens for austerity measures. Overall you think which are the measures which government can take to tackle the situation?

[00:06:26]Well, those measures are already being rolled out. Initially the government absorbed the oil shock through a cut in excise duties and the oil companies absorbed the shock by not raising the prices. Now the time has come for the burden to be shared with the consumers.

[00:06:42]So we have seen two rounds of oil price hikes.

[00:06:46]And I would certainly expect that further uh, rounds of oil price hikes will happen. Incrementally the oil price will have to go up if the oil companies are to maintain their uh, P&L in some reasonable shape. The estimate that was quoted in the papers for the losses incurred by oil marketing companies is something like 1 trillion every quarter and that is certainly not sustainable.

[00:07:16]Uh, right. And overall it has a spiraling impact if you I can use that word for other things as well. Logistics cost as well as input cost prices for various other things increases after such kind of fuel price hike. So therefore I want to understand from you two things. One, on the rupee part which has been depreciating ever since the in fact I would use that word calendar year Uh, we are the worst performing Asian market currency and also current account deficit is something which India needs to tackle. So how to draw that balance and how do you think Reserve Bank of India and government can do it?

[00:08:01]Well, I think the policy so far has been to allow the rupee to depreciate in line with the fundamentals. If the current account deficit is going to widen to something like 2% of GDP at the current oil level prices, it's natural to expect that the the rupee will depreciate and especially when there's a huge outflow of foreign investor money if I outflows.

[00:08:31]And so the policy has been to allow the rupee to absorb much of the shock, but as always the policy is to ensure that there is no excess volatility in the market. So you manage the downward fall in the rupee through intervention with the help of foreign exchange reserves. This is a policy that has been followed for several years now and we should not be surprised that the same has been put into effect. I mean the real challenge I feel will come if there is an escalation in conflict and oil prices rise above the current level.

[00:09:10]Of course I mean that is something which needs to be watched out for because the worst of the anticipation or the action which we have seen in recent past is around 120 levels. So but if the oil prices go beyond that level and as you were discussing how much of the sustainability will be there not only for India but for other parts of the world as well.

[00:09:33]Yes, it is a challenge. I mean you know you've seen the IMF forecast for the global economy being revised downwards with respect to last year.

[00:09:44]And this was you know, when the oil prices were a little lower. The forecast IMF forecast came out in April when the oil prices were a little lower.

[00:09:53]And so I mean, the global economy faces a huge challenge and that is why there's tremendous pressure from everybody for a resolution of the conflict.

[00:10:05]And India like everybody else will have to face the impact. There's no escape from it. It's a very serious challenge for everybody.

[00:10:17]Right. And I want to ask you some specific questions from you because you are a part-time member of PM's economic advisory council. And therefore from the government's standpoint, what can be the measures specifically? Now there are multiple options, multiple opinions which has been given, but overall you think it will be a good idea for considering excise duty cuts?

[00:10:46]Well, some of that has happened. I mean, at least for now you will be excise duty cut has happened. But you see the the idea is to distribute the burden. So when you say that the government should cut the excise duty, then there's a certain a fiscal impact.

[00:11:00]Already I'm I've seen that the impact of the duty cut on oil is going to be 0.5% of GDP on the fiscal deficit. So the fiscal deficit target of 4.3 is going to inch towards 4.8 as it is. So there's not much that the government can do in terms of absorbing the impact all by itself.

[00:11:23]And the burden will have to be spread among the different constituents.

[00:11:29]And therefore certainly they you know, the middle class and other lower income groups will have to brace themselves for a fairly rough ride in the months ahead.

[00:11:43]Right. One last question before I let you go. You have seen many crises as I was saying earlier too as well.

[00:11:51]But comparing with other problems which the world has seen, India has seen, where do you rate the current scenario?

[00:11:59]And how much of a sustainable system government is prepared to tackle the same?

[00:12:07]Yeah, so in terms of the oil shock, I mean you have to think of the oil shock of the 1970s.

[00:12:14]At that time the oil price quadrupled.

[00:12:17]Now, what we are seeing now is something like a 50% increase.

[00:12:21]And secondly, you know, the entire world economy has undergone major changes. It has become many economies have become more services driven and therefore and more energy efficient. So, there are a number of factors which make the world economy a little more resilient than we saw in the 1970s.

[00:12:40]And then, you know, in COVID there was a complete shutdown.

[00:12:44]There was a both a supply shock and a demand shock.

[00:12:48]And so, now we are not seeing that sort of combination. It's only, you know, it's overwhelmingly a supply shock.

[00:12:54]And therefore, I think when you compare with some of the crises in the past, at the present oil the level of oil prices, I think the the world economy and also the Indian economy is reasonably well equipped to handle the crisis. If the oil prices go up to $150 or above, then I'm afraid we are entirely in the realm of speculation.

[00:13:19]All right, Mr. Rammohan. Thank you so much for joining at this hour with your views and in