Crude oil at $80 a barrel: How this will impact Modi govt's fiscal maths

Surge in crude oil prices not only increases the burden on retail fuel consumers in India but also presents the Narendra Modi-led central govt with a dilemma over whether or not to intervene

Soon after global crude oil prices hit $80 a barrel, the government said it expected an increase of $25-50 billion in the import bill for 2018-19. That could lead to an oil import bill of $130-155 billion. India’s crude oil import bill for 2018-19 was estimated at $105 billion, according to the petroleum ministry's Petroleum Planning and Analysis Cell (PPAC). Expenditure Secretary S C Garg admitted that the current account deficit would also be impacted, indicating that the rupee could be under further pressure. On the fiscal deficit front, however, he saw no reason to sweat. What fuelled this confidence? 

And what do increasing oil prices mean for the Narendra Modi government, which for a large part of its term has enjoyed declining prices, and thereby an estimated revenue bump of Rs 2.5 trillion a year? A dilemma that the government faces. especially ahead of the 2019 general elections, is whether it should control the escalating fuel prices for retail consumers or not.

During the previous regime, the Manmohan Singh-led United Progress Alliance (UPA) government, even as the global crude oil prices soared past the $150-a-barrel mark, the retail consumer of petrol and diesel remained mostly insulated. The government subsidised any increase in oil prices. However, towards the end of the term and before the Narendra Modi-led government took office, the retail price of fuel was deregulated -- first petrol, and then diesel, too -- and linked to market forces.

Now, as the petrol and diesel prices have begun to rise rapidly, the common man is the worst hit -- something that the government would not like before heading into the Lok Sabha elections, scheduled for next year. At the same time, any intervention on its part to contain the prices through subsidies would mean taking a severe hit on the fiscal front.

Will the govt cut excise duty to to lower petrol, diesel prices?

The government saw no real impact on its fiscal situation and subsidy bills, Expenditure Secretary S C Gard said recently. “There is no reason for us to believe there will be any great impact on the fiscal deficit. We will continue to ensure that there is no adverse impact on fiscal deficit.” Asked if the government would cut the excise duty on petrol and diesel, he said: “Just watch. There has been adjustment to the prices in past few days. What does that indicate?” Excise duties account for a fourth of retail selling price of the fuels.

Is the onus of reducing prices on states?

When the upward march of crude oil prices had only just begun, the petroleum & natural gas and finance ministries had said that states should agree to bring five petroleum products -- natural gas, petrol, diesel and aviation turbine fuel (ATF) and crude oil -- under the goods and service tax (GST). Finance Minister Arun Jaitley had also said that states should cut other tax levied on petrol and diesel, while Finance Secretary Hasmukh Adhia (currently on leave) had ruled out any cut in central excise duty, which had been increased steadily over two financial years until March 2017, when the global prices were low. “We share the tax kitty collected through increases with the states,” the finance ministry said more than once.

Is oil the new monsoon?

Earlier, the Indian economy and the political climate were  dependent on monsoon. A bad monsoon meant a bad year for the economy and the government, and vice versa. The central governments led by Atal Bihari Vajpayee and Rajiv Gandhi in the past, for example, were badly hurt by years of poor monsoon . Over the decades, however, things have changed a lot. Prime Minister Narendra Modi for one has survived two bad monsoons.

In today's time, the global price of crude oil makes or breaks fiscal years and the reputation of political parties. High crude oil prices, like the one the UPA government suffered in its second term, lead to unrest about inflation, accusations of corruption, and constrained growth. A year before the Lok Sabha elections, the present central government under Narendra Modi would like to avoid these.

 

CLSA's Chris Wood sees rising crude oil prices as a key threat to Indian equities

The main risk to investors in Indian equities, from a dollar return perspective, remains the rising oil price, wrote CLSA managing director and equity strategist Christopher Wood in his weekly note GREED & fear. Prices for global benchmark Brent crude shot above $80 a barrel Thursday, as Washington’s decision to reinstate sanctions on Iran extended a rally that has pushed the market to their highest level since 2014. In the past one year alone, Brent oil price has flared over 56 per cent, data shows.