Blog

The Single Engine that can change the trajectory for the Indian Economy and Companies

We have all grown up reading that the Indian economy is dependent on imported crude oil.

How much of a difference does it make to the Indian economy and corporate world? We are just about to see.

Crude is now down about 30%-35% from its 2022 peak.

If it remains around these levels, it can be the single engine push upwards for the Indian economy and provide some breathing space to companies as well.

Let's just tick it off.

Good for:

GDP growth✅

Inflation control✅

Reducing the Current account deficit✅

Margins/demand positive for FMCG, Oil marketing companies, Chemicals, Textiles, Paints, Tyre, Cement…etc✅

In fact, it is our considered opinion that part of the reason why the RBI decided to pause rates, was that the heavy lifting on GDP growth and inflation control could be achieved by the crude price decline.

Strangely, the one thing you can't be sure of, with petroleum prices coming down is, that fuel prices will reduce.

Now for the more granular stuff:

India imports more than 87% of its crude oil needs and hence, a decline in Crude prices is always beneficial for the Indian economy.

This means that if the prices decline, less foreign currency is used to purchase crude oil, benefiting the economy in general.

Also, our trade deficit benefits from the drop in crude oil prices. According to some estimates, a fall of $10 in crude globally could reduce India's Current Account Deficit by roughly 0.5% of GDP.

Secondly, since the end-user industries, such as Oil marketing companies, Tyre and Paint manufacturers, Fast-Moving Consumer Goods (FMCG) producers, Airlines, Synthetic Textiles Carbon black, Cement and Lubricant players heavily rely on crude oil and its derivatives, a decline in crude oil prices will undoubtedly help them lower their input costs and in turn improve Gross margins and corporate profits.

Decline in crude oil prices would also reduce the cost of long term Liquefied Natural Gas (LNG) as well as other downstream products, which also benefit sectors like the Fertilizers, Specialty Chemicals, Plastic and Polymers/ film manufacturers and even Dyes and Dye intermediates. 

The sectors likely to be benefited are:

FMCG
Crude based raw materials like Edible Oil, Light Liquid Paraffin (LLP) are used in the manufacture of many FMCG products like Biscuits, Shampoos etc. and hence, a fall in Crude prices should benefit the sector and players in this sector.

In addition, some other ingredients for this sector, like palm oil, have also declined substantially.

The players can decide on whether to pass on these cost decline and bring back volumes or to let margins go up a bit, or a combination of the two.

Oil Marketing Companies (OMCs)
A fall in the crude prices can help improve marketing margins of the Oil marketing companies (depending on government pricing policies) and this should, in turn, help improve their profitability.

Paints
Manufacturing of paints requires over 300 inputs, most of which are petroleum-based. The paint industry was already suffering from subdued demand post the Covid lockdowns, and the surge in crude oil prices further impacted their margins and profitability.

With crude falling, the sector is likely to benefit with their input costs coming down.

Specialty Chemicals and Dye and Dye Intermediates
Both these sectors use a large proportion of downstream products from Oil as raw materials like Aniline, Toluene, Benzene etc. and hence, a fall in crude prices should improve their margins.

Textiles
Crude oil is an important component in the manufacture of fibre, yarn, fabric and other textile products. Hence, Synthetic textile manufacturers are also one of the key beneficiaries of falling crude oil prices.

For Textile manufacturers, additionally the 30%-40% correction in cotton prices should bring in margin improvements.

Tyres
Tyres depend heavily on crude oil and its derivatives comprise nearly 60% of the cost of production of a tyres.

Hence, a fall in crude prices should benefit players of this sector.

Also, rubber prices have fallen in the recent past. Rubber prices are down about 22% from the highs witnessed last April, while crude prices are down about 38% from the highs of 2022.

This should benefit the Tyre manufacturers.

Cement
A cool off in crude oil prices could bring some cheer to the sector, as via power, fuel and packaging, a significant portion of the sector's costs are directly and indirectly linked to crude oil prices.

Aviation
Aviation industry is amongst the worst affected by rising crude oil prices, as aviation turbine fuel is the single biggest cost driver for airline companies. Jet fuel prices have been hiked from ₹72,000 per kiloliter (kl) to ₹1,23,000 – a hike of ₹51,000 since the beginning of 2022. Now, ATF prices have started falling gradually. By March 2023, Aviation turbine fuel (ATF) prices have fallen to ₹107,750 per kl. Hence, this should overall benefit players in this sector.

From the desk of 

Devina Mehra

If you want any help at all in your wealth creation journey, in managing your Investments, just drop us a line via this link and we will be right by your side as your wealth advisor, super quick!

Or WhatsApp us on +91 88501 69753

Chat soon!

Tell Us What You Think:
Accolades & Happiness Under Management

First Global has been widely commended by Global Media. And by thousands of big & small investors worldwide

Subscribe to our fun & thought provoking articles

Contact us on (contact@firstglobalsec.com), to get cracking on building serious wealth!

Follow our buzzing social media handles

- Attention Investors -
1.Prevent Unauthorized Transactions in your trading account. 1.1. Update your Mobile Number/Email Id with your stockbroker. 1.2. Receive information of your transactions directly from the Exchanges on your Mobile/Email ID at the end of the day. - Issued in the interest of Investors
2.Stock Brokers can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 01, 2020. 2.1. Update your email id and mobile number with your stock broker / depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge. 2.2. Check your securities / MF / bonds in the consolidated account statement issued by NSDL/CDSL every month. -Issued in the interest of Investors.

Quick Links

Get in touch

Regulated By

FCA in the UK
SEBI in India

•      SEC in the US
•      CIMA in Cayman Islands

First Global Stockbroking Pvt. Ltd. SEBI Regn No.INZ000210739 AMFI Regn ARN-79096

First Global Commodities Pvt. Ltd. SEBI Regn No.INZ000082436

First Global Finance Pvt. Ltd. Merchant Banking: INM000010627 PMS Regn No. INP000006697 Research Analyst Regn No.: INH000004635

First Global Securities Pvt. Ltd. AMFI Regn: ARN -32949

Copyright 2019, All Rights Reserved. Developed By : Hvantage Technologies Inc. Maintain By : Aarav Infotech