Higher crude prices could strain government’s budget maths
Crude prices are expected to increase given the Organisation for Petroleum Exporting Countries (OPEC) and Russia extending an agreement to cut oil output till the end of 2018.
The government could consider $65 a barrel as the crude oil price (Indian basket) for its calculations in Union Budget 2018, top officials in the finance ministry said. The number is likely to put pressure on the budget maths.
The $65 number, which is around $10 higher than that used for calculations in Union Budget 2017, is on account of higher crude oil prices. As of 25 December, Brent crude was trading at $65.06 a barrel. The price of India’s crude oil import basket was $61.32 in November, up from $52.49 in March, according to the petroleum ministry’s Petroleum Planning and Analysis Cell.
As a net importer of crude oil, the rising price of oil does not bode well for India. It could hurt the current and fiscal deficits, increase costs for a variety of products and services, resulting in inflation, affect corporate profits, even turn the investment sentiment negative.
Crude prices are expected to increase given the Organisation for Petroleum Exporting Countries (OPEC) and Russia extending an agreement to cut oil output till the end of 2018.
“Crude prices are re-balancing in 2018 given the OPEC production cut and a rebound in demand growth in Europe and US. For India, we are the happiest when crude prices hover around $45-$50, but those days are gone. Crude is expected to be range bound at $65 per barrel,” said Mriganka Jaipuriya, associate editorial director, Asia and Middle East, oil news and analysis, S&P Platts.
The downward spiral of crude since the end of 2014 reduced India’s oil import bill from $112 billion in 2014-15 to $64 billion in the last fiscal year. This in turn helped the government trim its current account deficit, which includes the trade deficit (gap between exports and imports), net income deficit (difference between payments and receipts related to interest, dividend, and salaries paid to foreigners working in India), and direct transfers.
“If the crude spike sustains in the remaining months of this financial year, then our import bill could inflate by another $8 billion from its current estimate of $85 billion,” said one of the finance ministry officials, asking not to be identified.
Despite two years of drought in 2015 and 2016, low crude prices the government to keep inflation under check. At current demand levels, India, which depends on imports to meet 80% of its oil needs, will have to spend around Rs 10,000 crore more annually for every one dollar increase in crude prices, according to calculations available with an economic advisor to the finance minister.
The government also increased its revenue earnings by increasing duties on petroleum products nine times since the crude oil plunge in 2014.
But India’s crude oil honeymoon is over.
LPG subsidy projected at Rs 13,000 crore is likely to increase to Rs 5,000 crore, as crude prices have not adhered to the government estimate of $55 per barrel this fiscal year.
The officials in the finance ministry said that oil subsidy is likely to be provisioned over Rs 25,000 crore for 2018-19, despite the projections of the mid-term expenditure framework at Rs 18,000 crore.
Increasing prices of motor fuel and subsidized and non-subsidised LPG cylinders forced the government to cut excise duty by Rs 2/litre in October to calm protests across the country. That means a Rs 13,000 crore dent to the exchequer for the remaining months of the fiscal.
The emerging crude oil scenario could also hurt the government’s ability to spend.
“Low government savings will definitely impact the elbow-room to spend. In the demand for grants we saw that the government has asked for more money for MGNREGA (its flagship rural job guarantee scheme). It means the focus is on more revenue expenditure so the cut will be on capital expenditure,” said Abheek Barua, chief economist, HDFC Bank.
The government front-loaded borrowing and expenditure in the first half of this financial year. Official data shows that the government reached 96% of the budgeted fiscal deficit target in October, leaving it no space to boost spending without breaching the deficit target. And lower than targeted revenue earnings thus far in 2017 have not helped.
Data from the Controller General of Accounts at the end of October showed that the government’s revenue receipts were at Rs 7.29 lakh crore in the seven months of the current fiscal, 48.1% of the budget estimate (BE) of Rs 15.15 trillion target for the entire year. The Reserve Bank of India halved its dividend payout to the government and spectrum sales haven’t gone to plan.