The government has increased fuel prices across the country, relaying some of the effect of the higher crude oil prices in the wake of the US war in Iran.As of now, there are too many variables to accurately predict the impact — such as how long the West Asia tensions will continue, how high crude prices will go and how much of the increase the government will pass on to the average Indian consumer.However, it would help to look back at India’s recent history as a way to understand how higher crude oil prices affect different aspects of the Indian economy.12 years of luck coming to an endWhen Prime Minister Narendra Modi first came to power in 2014, the Indian economy — especially its consumers — had been suffering from the effects of high crude oil prices for three preceding years (2011-12, 2012-13 and 2013-14). In all those years, the crude oil price of the Indian basket — basically the price at which India procured oil — ranged from $114 a barrel to $106 a barrel; one barrel is roughly 160 litres (see chart 1).Chart 1Soon after Modi took charge, however, the international situation changed and global crude oil prices fell sharply. Within a couple of years, they were at one-third of the price that the previous government paid. What’s more, the Union government never saw crude touching $100 again.That has changed now with the first two months of the current financial year — April and May — recording the Indian basket of crude oil at $115 and $106 a barrel, respectively.Story continues below this adIf prices remain anywhere close to the $100-per-barrel level for the full year, that would imply an increase of around 40% over the previous year’s cost.Such a sharp increase would either upend household budgets (if the government entirely relays the price increase) or the government’s budget (in the form of higher borrowings if it decides to bear the brunt itself).ExplainSpeaking | Why PM Modi’s call to save forex could slow down India’s growthWhen governments borrow more to pay for the fuel bill instead of passing on the costs to consumers, they are only deferring the inevitable. Consumers, eventually, will have to pay for higher prices either today (in the form of higher prices at the petrol pump) or tomorrow (in the form of higher taxes to repay the government’s increased debt).Story continues below this adHere’s a look at how crude oil prices were relayed and how they different macroeconomic variables over the past 15 years.Retail pricesTable 1 shows the impact on retail prices across various types of crude oil products in each year.Table 1As the data shows, while crude oil prices crashed all the way up to and including the Covid year (2020-21), for most commodities barring Aviation Turbine Fuel (ATF), retail prices actually went up. This is true even for the Covid year when crude oil prices rose by as much as 30%, and yet pump prices of petrol and diesel actually went up.Since then, however, the trend changed in the wake of the increased demand owing to the global economic recovery and the supply constraints caused by the Russia-Ukraine war.Story continues below this adInflationInflation rate is the rate at which prices increase over one year to another. Typically it is a positive number — suggesting the general price level went up from one year to another — but sometimes it can be negative too — suggesting prices actually fell from one year to another.Table 2 shows the impact of higher crude oil prices on the main types of inflation— wholesale and retail. The wholesale inflation is more affected by fuel prices than retail inflation because fuel prices have a bigger weight in the way wholesale inflation is calculated.Table 2Unsurprisingly then, wholesale inflation has stayed very modest in most years — in some years even being in the negative zone implying that wholesale prices fell.Retail inflation — which is what an average consumer might be facing — has been much higher, not just in comparison to wholesale inflation but also from the RBI’s target rate of 4%. In particular, this is true of the four-year period starting the Covid year of 2020.Story continues below this adEconomic growth ratesTable 3 brings out why higher crude oil prices tend to alarm Indian policymakers. It shows both the nominal and the real GDP growth rates; the nominal growth rates are inclusive of the effect of inflation and the real is without them.Table 3Broadly speaking higher crude oil prices are detrimental to India’s real GDP growth while lower prices help India’s economy zoom. In 2015-16 and 2016-17, for instance, when crude oil was in mid-$40s a barrel, India grew at 8% and above. In the last years of UPA-2, oil prices were well above $100 and the growth rate struggled between 5% and 6%.To be sure, the data in this table is based on the old GDP series since the new one still doesn’t provide historical data. A crucial aspect of the old GDP series is that it was found to be overstating India’s GDP — both nominal and real. As such the growth rates are likely to lower when the back series is released.Trade balance, forex and exchange rateThe trade balance refers to the net effect of the export and import of goods between India and the rest of the world. Since India has a high dependence on crude oil imports — a dependence that has only increased over the past 12 years — higher crude oil prices tend to worsen India’s trade balance. In the data, a negative sign is referred to as a trade deficit.Story continues below this adA higher trade deficit has to either be plugged by surpluses on other aspects of India’s Balance of Payment (trade in services, foreign investments into India etc.) or by depreciation in the rupee or else by drawing down forex reserves (read dollars).As can be seen from table 4, India’s trade deficit starts going up every time crude oil prices rise. This also correlates with sharp depreciation in the rupee’s exchange rate. In fact there were only two years out of the past 15 when rupee appreciated against the dollar — 2016-17 and 2020-21 — and in both years, crude oil prices were below $50, less than half of where they are at present.Table 4The sharp depreciation of rupee in the past year, is a result of the fact that India’s weakness in the trade balance has not been offset by surpluses on other accounts and this has put pressure on India’s exchange rate.Health of government financesTypically, higher crude oil prices tend to worsen the government’s fiscal deficit — which essentially refers to the amount of money the government was forced to borrow in a bid to bridge the gap between its expenses and its earnings.Table 5 squares up these two variables.Story continues below this adTable 5What is concerning about this table is that the government seems to have registered higher fiscal deficits despite having much lower oil prices. While it is true that part of the problem has to do with the Covid-era expenses, it is also true that in all those years oil prices were half or even one-third of where they were before the Modi government took charge. It is also important to note that even in the years before Covid and when oil prices were acutely low, the NDA government never once achieved its FRBM (Fiscal responsibility and Budget Management) Act targets of a fiscal deficit of 3% (of GDP).The important thing is this: Given the past record, fiscal management will likely take a hit if oil prices stay elevated at $100.In conclusion, higher crude oil prices worsen India’s trade deficit, stroke inflation, depress growth, hit exchange rate and increase government debt.