March 13, 2020 / 3:58 AM / 16 days ago

Breakingviews - Cheap oil will fund quasi-handouts for Indians

An employee fills a vehicle with petrol at a fuel station in New Delhi June 25, 2010. India's government on Friday freed up state-subsidised petrol prices and hiked other fuels as high global oil prices and pressure to trim the budget deficit outweighed concerns about the political impact of the measures. REUTERS/Mukesh Gupta (INDIA - Tags: ENERGY BUSINESS POLITICS)

MUMBAI (Reuters Breakingviews) - India can afford to give consumers a boost. An effective month-long ban on foreign tourist visas goes into force on Friday as the government seeks to limit the spread of the coronavirus. Travel restrictions make sense to prevent a big outbreak in a poor nation with a weak health system, but the move will hurt a sector that contributes around a tenth of GDP in a slowing economy already reeling from financial blowups. New Delhi can soften the blow by allowing consumers to pocket the benefit of low crude prices. 

Cash handouts have gained popularity among policymakers as they try to prop up demand that has been crushed by measures implemented to slow the spread of the breakout, and by rising fear. Consumers, the logic goes, will spend faster and more efficiently than governments. Hong Kong and Australia have already announced direct cash payouts to residents. 

Luckily, cash-strapped India, the world’s third largest importer of crude, has an alternative: it can pass the 40% slump in oil prices over the past month along to the market. That would be a far more efficient way to stimulate the economy than, say, cutting incomes taxes in a country where so few pay them. Economic growth slipped to 4.5% in the September quarter, but Citi analysts note that every 10% decline in oil pushes Indian GDP up 15 basis points.

Diesel prices were deregulated in 2014 as global energy costs fell; petrol was liberalised even earlier. But Prime Minister Narendra Modi’s government has largely retained those savings for itself by ramping up taxes. Duties now account for about half of retail fuel prices. Officials will once again be tempted to keep the gains given New Delhi’s shortfall of tax revenues.

Politicians are resisting so far, however, and prices are starting to fall. Passing on the full benefit will help to stimulate spending and relieve debt. India’s household borrowing is lower in relative terms than in other major emerging markets, but overall retail credit has risen from 12% to 17% of GDP between 2011 and 2019, says Ambit analyst Sumit Shekhar - a worrying trend given tepid investment and job creation. Low oil prices give India a window to ease the risks and fund a quasi-handout. 

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