It’s has been my opinion that we are underestimating the impact of sharp fall in crude prices on our economy. When you country imports oil in billions of dollars and suddenly the purchase price halves then savings on import bill will be significant. The numbers given by RBI deputy governor is Rs. 50 billion on annualised basis i.e. one third of our annual gross import bill of Rs. 160 billion. The impact of the dramatic shift in government finances will be on many components. The first one that comes to my mind is the rupee. We may see an appreciation in the rupee in this quarter. My view is strengthened after reading this article in economic times stating that the government may end up having current account surplus.(http://economictimes.indiatimes.com/markets/commodities/with-oil-at-50-why-is-rupee-still-trading-at-62/articleshow/45934616.cms)
The current account balance is the difference between the export and import of the two trades. If exports are more than imports then the current account is in surplus. This is usually measured as a percentage of GDP. India normally runs a large trade deficit; that is, its imports exceed exports. This financial year it was pegged to be at 4.1% of the GDP. The fall in crude prices could amount of savings of 2.5% of current account deficit on run rate basis in forthcoming quarters.
Recently, a regression analysis between current account and gross domestic product between 2003-04 to 2013-14 done by Dr P Chellaswamy and R.Shankar (from Bharathiar university Coimbatore)showed that both the variables were significantly correlated (R-squared=0.640) and hence current account has a significant impact on GDP. Further various elements of current account too were positively correlated.
Therefore based on above assumptions a 2.5% savings in current account deficit could call for upward revision in GDP of approximately 1.5% solely due to crude prices