Lifting of sanctions on Iran is beneficial for India considering its net crude importer position. While the cheaper imports will help India ease its fiscal burden, the impact on the domestic equity market is something that the government will have to keep a close eye on.
On Monday, oil prices slid to their lowest since 2003, below the $28 per barrel-mark, after the United States lifted sanctions on Iran over the weekend. For India, there is a silver lining, considering that the NDA government at the Centre has reaped the benefits of lower crude prices, which has more than made up for any possible shortfall in revenue collections this fiscal and the prospect of the disinvestment target being missed by a mile. The United States’ decision to lift sanctions on Iran will ensure, at least in the medium term, that the crude prices continue to remain low and the oil bonanza can be reaped by Indian government well into the next fiscal. The overwhelming view among experts is that the development will also open up new business opportunities for India Inc, with several companies in the oil & gas, construction and capital goods sector expected to see business opportunities coming their way from Iran.
Low crude price though are a negative for stock markets because of the global linkages, it may provide the government with the much needed flexibility to push public investment and also manage to part-finance its outgo on account of the Seventh Pay Commission.
Lower crude prices and India’s fisc
Over the last 18 months the Brent crude oil price has fallen from $106 per barrel to $28 per barrel resulting into big gains for the economy and the government. While the government passed a part of the benefit to the consumers in India, it retained some of it for itself by way of an increased excise duty on petroleum products and thus filling the exchequers. On the one hand it helps the government to make up for its missed targets of revenue collection or fund mobilisation (disinvestment) and on the other hand it provides with the additional fund to push infrastructure development.
Following the decline in crude oil prices, the government raised the excise duty on petrol and diesel 8 times by an aggregate of Rs 10.77 per litre for petrol and Rs 11.97 per litre for diesel over the last 14 months. While this resulted into a significant jump in excise tax collections, the government said that the additional excise collections would be utilised to fund its ambitious infrastructure development programme, particularly in building of 15,000 km of roads during current and next fiscal. “Allocation of these resources to the road sector will also spur economic activity and employment generation arising from the road construction sector,” the government had said earlier.
Now, following the lifting of sanctions on Iran, the supply is set to further increase. Iran — a member of the Organization of the Petroleum Exporting Countries (OPEC) — has said that it can increase its exports by 5,00,000 barrels per day (bpd). While market sources say that Iran has the potential to supply additional one million bpd in the market, they point that this will ensure that the crude trades at lower levels even in FY17.
Oil demand in India is also price elastic and a decline in prices results into an increase in consumption, thereby resulting into higher excise collection. While the excise collection for FY14 and FY15 amounted to Rs 77,982 crore and Rs 99,184 crore, respectively, collections in the first half of this fiscal has already reached Rs 70,494 crore. This seems to be a result of higher excise duty and increased consumption of fuel. If the prices remain low, benefits will continue even in the next year. An economist, who did not wish to be named, said that this provides the government with the flexibility to manage its finances. “The government’s fiscal deficit target has been saved due to this,” he said.
While a significantly lower crude oil price came as a saviour, it raises concerns on global growth and trade putting pressure on corporate earnings, tax collections and even the capital markets. A fall in oil prices puts pressure on the earnings of oil and other commodity linked companies and that hurts the earnings growth of several indices and thus may pull the indices down.
“Sustained oil below $30 is not good for the global economy and India, as it often leads to a recession. Portfolio investors and sovereign wealth funds from energy-rich nations have started withdrawing capital from India and that is getting reflected in the stock markets,” said Debashish Mishra, partner and energy expert at Deloitte Touche Tohmatsu. “Oil around $50/barrel is a sweet spot for India. Also, at lower levels, upstream oil sector here will not see much investment.”
If low oil prices may impact tax collections and disinvestment proceeds, the benefits on account of higher excise duty will help the government clear its dues next year on account of the implementation of the 7th Pay Commission recommendations and also meet its fiscal deficit target for the year.
Push for India Inc
While the stock markets may continue to reel under global growth concerns if the decline in crude prices continue, experts say that the lifting up of sanctions may open up business opportunities for Indian companies across construction, capital goods, oil and gas and some other sectors.
Arvind Mahajan, head of energy and infrastructure practice at KPMG said that the lifting of sanctions would be positive for India. Firstly, India will get to strengthen its old relationship with Iran and secondly, fresh supply is likely to keep the crude stable over the next couple of years. He further said, “The proposed Iran-Pakistan-India pipeline to transport natural gas, which has been stuck for many years, will now have better chances taking-off and the construction of this pipeline would significantly improve gas availability. Indian companies are expected to be front-runners in bagging oil and gas fields in Iran as and when these are bid out.”
Mishra too pointed that Indian companies would get opportunities to invest in Iran. “Other than possibilities in gas and LNG, Indian companies would also find investment avenues in industries such as aluminium, fertliser etc in Iran.”
There are some who point that the Iranian exports come at a very bad time as a decline in prices from current levels will put equity markets across the world under stress as investors will pull out their investments from emerging and even developed markets.