India is better equipped to deal with crude oil prices above $100 a barrel than it was in the past, as stronger services exports and money sent home by Indians help cushion the impact of expensive oil, Neelkanth Mishra, Executive Director-India at the World Bank, has said.
High oil prices, rising US bond yields and foreign investor outflows remain concerns. However, Mishra said India’s domestic economy had remained resilient despite the difficult global environment.
Crude oil prices are expected to remain around $100-$105 a barrel in the near term, increasing India’s import bill. As one of the world’s largest oil importers, India has to spend more dollars when crude prices rise.
“I must say that in the midst of all this, India is holding up remarkably well. There are new positives that have come up, which I don’t think have been appreciated as much,” Mishra said.
Services exports and remittances offer support
India’s growing services exports are helping offset the higher cost of importing oil, Mishra said. Services exports have risen 14%, despite concerns that artificial intelligence (AI) could hurt the country’s IT services industry and put pressure on the rupee.
Mishra estimated that the combined increase in services exports and remittances — money sent to India by people working overseas — could exceed $50 billion year-on-year.
This could help cover much of the additional cost of importing oil. Mishra estimated that higher crude prices alone could add $55 billion-$60 billion to India’s import bill. Including other imported commodities, the additional cost could rise to $70 billion-$75 billion.
The increase in services exports and remittances has helped cushion the pressure on India’s balance of payments, which tracks money flowing into and out of the country.
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Mishra also suggested that the rupee may not need to fall sharply to adjust to higher oil prices. If the currency remains stable for a period, exporters may be more willing to bring their dollar earnings back into India, while importers could reduce the need to hedge against currency movements.
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AI threat to IT services may be smaller than feared
The potential impact of AI on India’s IT services industry remains a concern for investors. However, Mishra believes the disruption could be less severe than initially expected.
He said software product companies and IT services firms operate differently. AI could challenge traditional software businesses that earn money through licensing their products, but it could also create opportunities for IT services companies.
As businesses look to develop software tailored to their needs, they may require technology firms to build and implement customised solutions.
“Now looking unlikely that it will be as meaningful as we feared,” Mishra said, referring to the potential impact of AI on IT services.
He cautioned, however, that the industry would still need to adapt. IT services companies may have to change their business models and retrain employees as clients’ needs and technology evolve.
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India resilient despite $100 oil, AI risks may be overdone: Neelkanth Mishra