As much as 80% of total oil required in India is imported and it makes up for one third of total Imports. Thus, a change in oil prices directly affects the Indian economy. A fall in the price of oil is mostly good news for Indian economy due to the various reasons Since Industries like transport are indirectly influenced by change in oil prices, the impact can be seen on the entire economy. The cost of transportation too comes down with a decline in oil prices. Lowering of this transportation cost translates into enhanced profits for the corporate sector.
It also lowers the prices of goods and services thus bringing down the rate of inflation. The price of fuel is often fixed by the government at subsidised rates. A fall in oil prices reduces the subsidies that government offers to cover the high cost of oil. A large part of this gain is used for past under-recoveries.
A reduction in subsidies also paves way for narrowing the fiscal deficit. The combined multiplier effect of fall in oil prices leads to reduced inflation, as mentioned earlier. This means lower prices of goods and services. It indicates more spending power and lower cost of business, both of which promote greater economic growth. Fall in oil prices also impacts the monetary policy. As the oil prices come down, the Central Bank has a better trade-off between inflation and unemployment. The banks can easily keep interest rates lower and further help the economy.