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Rising oil prices may hurt growth in the Indian economy, which is heavily dependent on imported crude, by pushing up input costs and choking domestic demand already at risk due to poor monsoon rains, analysts say.
US light crude prices have surged by more than one-third in 2004 to above $44 a barrel on worries that accelerating global demand has left supplies tightly stretched, with little leeway for disruption.
The Indian economy, Asia's fourth-largest, imports about 70 percent of its requirements. India's oil bill of $6.6 billion last quarter was about 30 percent of all imports.
Analysts said rising oil prices would have a cascading effect on almost all input costs and affect Indian manufacturers, who are already bracing for a demand slowdown if this year's erratic rains hurt farm output and lead to a dip in Indian incomes.
A $5 per barrel rise in oil prices would cost 0.5 percentage points of Indian economic growth, the RPG Foundation think-tank found in a 2002 study. Oil has risen more than $5 in the past month.
"There will be nearly a 1-percentage-point rise in inflation due to oil prices and this will lead to a depression in demand, and consumption will be hit," said Anushree Sinha, principal economist with National Council for Applied Economic Research.
"Any attempt to hike retail prices will lead to further deceleration in demand. It is not at all a positive outlook."
India's farm-dependent economy was 8.2 percent larger in the year to March 2004 than it had been in 2002/03, showing the fastest growth in nearly 15 years and helped by the best monsoon in a decade, which boosted farm output by more than 9 percent.
Finance Minister Palaniappan Chidambaram expects gross domestic product to be up by 6.2 to 7.4 percent this year.
But investors worry that oil prices and a jump in food prices due to a poor monsoon will pull annual inflation to above 7 percent in the coming weeks.
An inflation rise could force the central bank to raise interest rates from three-decade lows, a prospect which has pushed the benchmark 10-year federal bond yield up by more than a percentage point since late April to the current 6.2 percent.
"We can see inflationary pressures building up. But the question is at what level it will exceed the pain threshold of the Reserve Bank of India," said Sanjeev Sanyal, Singapore-based economist with Deutsche Bank.
Wholesale prices rose 6.52 percent in the year to mid-July, compared with 4.32 percent in the year to late April.

Copyright Reuters, 2004

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