10 minute read 26 Sep 2022
oil price shocks

How can India sustain its GDP growth despite prevailing global headwinds?

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

10 minute read 26 Sep 2022
Related topics Tax Global trade

Changing contours of India’s trade and capital flows call for substantial policy support.   

In brief

  • For minimizing India’s multidimensional vulnerability to global crude oil shocks, setting up an Oil Price Stabilization Fund may be considered.
  • As a part of India’s medium-term growth strategy, a current account deficit largely financed by FDI inflows may be required for some more years.
  • India may do well by reducing its import dependence and establishing domestic capacity, which calls for a substantial increase in public sector investment.

In the wake of the ongoing geopolitical developments, key structural changes are happening in terms of international trade and capital flows. These call for major adjustments in relation to sourcing and composition of imports as well as destination and composition of exports, supplemented by substantive policy support. In India’s context, the vulnerability of inflation, GDP growth, current account deficit, and fiscal deficit to global crude oil price shocks are well-recognized. In this backdrop, we review the recent trends in international trade and capital flows and consider ways by which the exposure to cyclicality of global crude oil prices may be evened out.

Episodes of global crude price upsurges

Chart 1 shows crude price movements beginning the mid-1990s. After remaining subdued during FY96 to FY04, global crude prices witnessed a long stretch of price surge up to FY09. Following a price crash in FY10 in the aftermath of the global economic and financial crisis, there was a second phase of increase in global crude prices wherein prices crossed US$100/bbl., reaching a peak of US$107.2/bbl. in FY12. These remained at an elevated level up to FY14. This was the period when India’s macro-balances, particularly the current account deficit relative to GDP, deteriorated sharply. Beginning FY15, global crude prices crashed again, reaching a trough of US$46/bbl. in FY16. Subsequently, prices recovered to US$67.3/bbl. by FY19 post which, there was a sharp fall in FY20 continuing in FY21 due to COVID-induced demand slowdown. In FY22, prices recovered as there was a release of pent-up demand along with significant supply rigidities. The third and the most recent phase of price upsurge began in FY23 on account of the ongoing geopolitical tensions. Global crude prices averaged US$110.1/bbl. in 1QFY23 and have remained elevated in the first two months of 2QFY23 as well.

Crude oil price shocks: impact on Indian economy 

India’s domestic economy remains vulnerable to global crude price upsurges affecting critical macroeconomic parameters. The RBI (2019, 2021) has provided some estimates of the effect of an increase in the price of Indian crude basket on key macro parameters. Column 2 of Table 1 shows the estimated impact of an increase in the price of Indian crude basket on real GDP growth, CPI inflation, current account deficit (CAD) and center’s fiscal deficit relative to GDP. The RBI used US$75/bbl. as the benchmark price of the Indian crude basket and the quantified effects relate to an increase of US$10/bbl. over this benchmark price.

We have provided an assessment of the impact of the average price of US$105/bbl.1 which is 30 basis points above the benchmark used in RBI’s assessment (2021). Accordingly, the estimated effects for FY23 are summarized in Column 3 of Table 1. Thus, in FY23, had India not faced the global crude price upsurge, our expected GDP growth would have been higher by nearly 1% point as compared to the present expectation of about 7%2

With a view to minimizing India’s multidimensional vulnerability to global crude supply and price shocks, a reconsideration of our strategy is required. In the short to medium term, it may be useful to revive the idea of an ‘Oil Price Stabilization Fund’. Many countries have taken recourse to such a fund 3. We used to have a system of Oil Pool Accounts until the late 1990s which were meant to serve this purpose. However, that system failed because these accounts became unsustainable due to lack of fiscal discipline. In particular, these accounts were not replenished in years when the oil prices were lower than their long-term average. For a successful working of stabilization funds, significant fiscal discipline needs to be exercised to ensure that such an account does not go into accumulated deficit. The accumulated balance in the fund, which is carried forward from year to year, may be invested in global and domestic oil related assets including oil bonds, oil exploration companies etc. In the medium term, the capacity for storage of oil needs to be expanded so that more options are available for absorbing external oil price shocks.

In the long run, there is a need to reduce India’s dependence on imported oil by accelerating the pace of the pursuit of non-conventional energy sources. There is also a need to accelerate unexploited domestic oil and gas reserves, both offshore and on land. 

Recent trends in trade and foreign capital flows in India

Based on recent quarterly data on exports from and imports to India, growth in imports started exceeding growth in exports on a consistent basis since 4QFY21, that is the time when the Indian economy started to recover from COVID. The supply shortages of raw materials and intermediate products and their adverse impact on growth during the COVID-affected quarters made it clear that going forward, India may do well to rely on domestic production for domestic consumption. For this purpose, additional capacity is required to be set up for producing intermediate and final goods within India. 

With the onset of geopolitical tensions in Europe, prices of global crude surged for all net importers of crude including India. As a result, net exports became negative, and its magnitude increased sharply. The contribution of net exports to growth has consistently remained negative since 3QFY21. In fact, in 1QFY23, this negative contribution of net exports at (-)6.2% points was at its highest since FY12 (Table 2).

Important countries for Indian imports (in value terms) include China, UAE, US, Saudi Arabia and Russia. Considering the period 1QFY20 to 1QFY23, the shares of imports from China and the US have fallen while those of UAE, Saudi Arabi and notably Russia have increased largely reflecting changing patterns of sourcing global crude. In terms of major imported commodities, the shares of machinery and electronics and conventional commodities such as pearls etc. have fallen. On the other hand, the share of mineral products including oil and coal has increased significantly.

With respect to destination of exports, important countries for India are US, UAE, China and Indonesia among others. Considering the period 1QFY20 to 1QFY23, export shares to the US and Indonesia have increased while those to UAE and China have fallen. In the case of mineral (including refined petroleum) products, the share of exports has increased noticeably primarily because of India being able to charge high prices for its exports of refined petroleum products. There has been a fall in the share of the relatively more traditional items such as chemicals, textiles and pearls etc. (See in-focus section of the September 2022 issue of EY Economy Watch).   

In the case of services exports, during the period 1QFY20 to 1QFY23, the highest share was that of computer services followed by professional and management consulting services. In the case of services imports, the highest share pertains to the group called ‘technical, trade-related and other business services’ followed by transport services, whose share has been increasing in recent years. Reflecting the continued impact of COVID, the export and import shares of personal travel remain significantly below their pre-COVID levels.

Major upheavals are also occurring in capital flows affecting India’s current and capital account balances which in turn impact domestic inflation and current account sustainability. Chart 2 provides a relatively long-term perspective on the movement of current account balance and that of net private transfers (remittances). Most years show a deficit on the current account while there have been only four years characterized by a surplus. The long period average of current account balance as a percentage of GDP over the period FY91 to FY22 is (-)1.2%. There is a noticeable correlation between global crude prices and the size of India’s current account deficit. With a minimization of exposure to crude price volatility, the volatility of current account deficit may also be contained.

Total foreign investment flows into India come in two forms namely, FDI and FPIs, that is, investment in Indian portfolios by way of subscription to Indian stocks and other financial instruments. Net FDI has shown a steady upward movement on an annual basis since the early years of the previous decade. However, it has been somewhat volatile in recent months. Net FPI flows have been volatile and in recent months have fallen somewhat sharply reflecting increased outflows from India leading to a depletion of foreign exchange reserves.  

As part of India’s medium term growth strategy, it would be useful to acknowledge that for some more years, a current account deficit may be considered welcome if it is financed largely by FDI inflows as long as the current account deficit relative to GDP remains sustainable. India continues to carry a significant volume of foreign exchange reserves and it would be useful to ensure that these reserves are managed in a way that would provide a reasonable return in terms of foreign exchange. Earlier studies have shown that a current account deficit of about (-)2.3%4 of GDP annually may be sustainable. Further, it is important to consider that with a view to making India relatively less dependent on imported supply of goods and services, a lot of capacity will have to be established within India. This calls for a substantial increase in public sector investment.

Macroeconomic expectations in FY23 and beyond

Ongoing geopolitical developments signal major structural changes affecting existing trade patterns especially sources of supply of important raw materials including crude and other intermediate products. Major changes are also happening in the international payment systems. Many large countries such as Russia and China as well as India are now actively promoting their individual currencies for trade with a number of other countries5. The Indian Rupee has continued to depreciate against the US Dollar while it has appreciated against the British Pound and the Euro. NSO’s recently released GDP data showed a real growth of 13.5% for India in 1QFY23. This contained a base effect which may not be available in subsequent quarters. The RBI had estimated a growth of 6.2%, 4.1%, and 4% in the subsequent quarters respectively. If these growth rates are realized, India would have a growth of 6.7% in FY23. However, with suitable fiscal policy support, it may be possible to uplift growth to close to 7%.


India may target to achieve a GDP growth of 7% in FY23 by uplifting its infrastructure spending. This may be facilitated by buoyant tax revenues, which are linked to high nominal GDP growth. Given current inflationary trends, it is expected that center’s gross tax revenues may exceed the budget estimates by a margin of nearly INR3.6 lakh crore.

About this article

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

Related topics Tax Global trade