The increase in oil prices in the world poses a huge problem to the economy of India because the economy is dependent on imports. The import bill is directly escalated by high costs of importing crude. This instantly causes an over-stretching of the current account deficit and drains the foreign exchange reserves. Thereby, the value of the rupee declines severely, which enhances the vulnerability of India externally.
Fuel prices that are rising raise direct transportation costs in the economy. This increases the prices of essential commodities and farm produce which inflate the prices. In a bid to counter this, the Reserve bank of India is usually under pressure of having to increase or keep the interest rates up. This may subsequently choke the use of funds within a country through a rise in the cost of borrowing.
State funds are threatened with high pressure. Under-recoveries of oil marketing companies can be a big percentage thus requiring compensation by the government. High prices also swell the subsidy accounts of local fuels. This distracts important financial resources that should be focused on major infrastructure and social welfare programs.
Sectors with high-security threats, such as transportation, manufacturing and agriculture are characterized by significantly increased costs of operation. Profit margins of industries which depend upon logistics or petro-chemical raw materials are compressed. This usually results in less production, possible layoffs and halt in expansion strategies killing off the growth of the economy.
Chronic high prices establish hard policy trade offs. It is increasingly difficult to have a balance between inflation management and growth growth. The government is torn whether to protect the customers through subsidies at the expense of finances or transfer the burden leading to inflation. This highlights the urgency of fast tracked uptake of renewable energy to decrease dependence.
Conclusion:
The rising oil prices across the world will pose a serious risk to the Indian economy. They expand the current account deficit, stimulate inflation, put a lot of pressure on government finances and add costs to the sector. This requires tough balancing of policy. As a partial solution to these effects, it will be necessary to maintain a high degree of fiscal prudence, and importantly, an acceleration of the shift to domestic clean energy production and elevated energy economy to lessen the insecurity of the structure.
