Crude oil price rise and rising rupee impact Indian industry

13 April, 2008:

The Indian industry is feeling the heat of increasing global crude oil prices and the rising rupee against the dollar. Crude prices are now moving to a new high on concerns of American recession and depreciating dollar. Oil prices are now at a record level of around $111 a barrel, after a sharp fall in US crude and fuel stocks has raised concerns about summertime supplies. Many industries such as airline, steel, manufacturing and automobile sectors have been struggling hard to exist at the current price structure.

The impact of high crude prices is limited in India largely because the government subsidises petrol and diesel. The crude prices have increased by nearly 10 per cent since end-December 2007. The rising oil prices are building up an underlying inflationary pressure. Though petroleum products' prices are administered in India, there is an incomplete pass-through of the burden to the final consumers.

The burden of the rising crude price has a huge bearing on the profitability of many industrial units in India. Commodities such as aviation turbine fuel (ATF), naphtha and bitumen have witnessed a huge price increase during 2007-2008. These products are selling at market-determined prices. Their prices are up by 27-39% year-on-year. It is expected that the rising price would have a huge impact on air travel, power and polymers sectors directly. We need to prepare to pay more for most manufactured products in the future.

High economic growth and high profit margins in India had earlier compensated for the rising crude price for many industries earlier. But now India is also facing the effect of global recession and high input costs. Most manufacturers are expected to take a price hike and some have done so in the first quarter of 2008. Any further increase in crude prices or a hike in domestic fuel prices will build more pressure.

Companies are also feeling the heat with the rising rupee. The rupee has appreciated around 14 per cent in 2007-2008. This has reduced revenues of most export-oriented industrial firms. The recent move by the government to ban export of essential commodities has only made it worse.