Across the aisle- Oil windfall: Gone with the wind

There is nothing extraordinary about the actual receipts or expenditure of government so far. No department is expected to spend more than the budgeted amount.

Written by P Chidambaram | Updated: January 14, 2016 5:16 pm
oil-plant759 A worker checks the valve of an oil pipe at Nahr Bin Umar oil field, north of Basra, Iraq. (Source: Reuters)

Several statements in the Mid-Year Economic Analysis are intriguing. For example, paragraph 1.4 says, “It is true that the decline in nominal GDP growth relative to the budget assumption will pose a challenge for meeting the fiscal deficit target of 3.9 per cent of GDP ” and quantifies the hit at 0.2 per cent. Nevertheless, paragraph 1.5 asserts, “As in FY 2015, so too this year, the government’s commitment to meet announced fiscal targets is steadfast… If the typical pattern of revenue collection and spending is taken into account, the first half outturn is well in line with meeting the year’s target. ”

That is welcome optimism. It quickly dispelled a momentary doubt. Yet I was intrigued why the doubt arose in the first place. I was also intrigued by the disarming modesty of the claim that the government will meet the annual target.

Why not admit windfall?

Why is the government shy to admit that it has reaped an oil windfall? In May 2014, Brent crude oil was selling at USD 109.5 per barrel. In September 2014, it was selling at USD 97.5 per barrel, and then the crash began. Its impact on the price of the Indian basket of crude oil can be gathered from the following:

September 2014: USD 97.0

October: 85.7

November: 77.1

December: 61.1

January 2015: 46.9

Since January 2015, the price has remained range bound and, in recent weeks, has fallen further. Two days ago, Brent crude price fell below USD 34 per barrel!

I made an attempt to estimate the “savings ” in the import of crude oil during the period December 2014 to November 2015 compared to the same period of the previous year (December 2013 to November 2014). The comparable average price for the two 12-month periods are USD 53.6 and USD 101.3, a saving of USD 47.7 per barrel!

In US dollars, the saving is about USD 40 billion (USD 93.47 bn – USD 52.74 bn). In Indian rupees, applying the prevailing exchange rates during the respective periods, the saving is estimated at Rs 233,000 crore (Rs 570,000 cr – Rs 337,000 cr) during the 12-month period.

Of course, the financial year is April 2015 to March 2016 and hence the estimated saving of Rs 233,000 crore may not be accurate. In my view, it would actually be more because crude oil prices have declined further since November 2015.

What did the government gain?

The “saving ” or gain is to the whole economy and will be shared among the government, corporates and households. The next step is to estimate the share of the gain that went to the government. The government has gained in three ways: (1) additional taxes levied on petroleum and petroleum products after the budget; (2) lower subsidy bills for fertilizer, LPG and kerosene; and (3) reduced expenditure on consumption of petroleum products by government departments, especially railways and defence.

I do not wish to burden (or bore) you with the math. I estimate that the government’s share will be about 60 per cent of the oil windfall of Rs 233,000 crore, that is, about Rs 140,000 crore. The more interesting question is, how did, or how will, the government use this gain?

The Controller General of Accounts has reported the revenue and expenditure figures up to November 2015. On the receipts side, net tax revenue, non-tax revenue and recovery of loans are performing better compared to the previous financial year and the 5-years moving average. Only capital receipts are lower, presumably because the disinvestment plan is in a shambles. On the expenditure side, as a percentage of the budget estimates, up to

November, total expenditure is 64.3 per cent, compared to 59.8 per cent last year and the average of 60.4 per cent over the last five years.

Therefore, there is nothing extraordinary about the actual receipts or expenditure of government so far. No department is expected to spend more than the budgeted amount. No department has been allocated additional funds. No extraordinary promise of funds has been made for any other purpose. There is no indication that the government has pre-paid any loans or has advanced the redemption of bonds to reduce the stock of debt. It seems to be business as budgeted.

Where did the gain go?

So, the question at the end of the year will be, where did the windfall go? I suspect the answers will be:

1. “We did not achieve the disinvestment target.” That would not be very complimentary to a government that advocates privatisation of public sector enterprises!

2. “We failed to achieve the tax revenue targets.” If this happens, despite the additional taxes levied post-budget, that would not be very complimentary to the department of revenue!

3. “Lower nominal GDP growth resulted in a higher fiscal deficit. ” If the government did not anticipate lower nominal growth despite warnings (and did not have a Plan B), that would not be very complimentary to a government (and party) that claimed to have all the answers to the challenges faced by the economy!

The gain has been used to fill these gaps. Imagine the benefit that would have accrued to the economy if public investment had got a Rs 140,000 crore boost! Imagine the greater welfare that would have accrued if the budget cuts to crucial programmes had been restored!

We got a windfall. And it has gone with the wind.


Website: | Twitter@Pchidambaram_IN

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  1. N
    Jan 10, 2016 at 10:51 am
    2G, Coalgate, and other mega windfalls - Ask your Italian Madam where the loots are now.
    1. K
      K SHESHU
      Jan 10, 2016 at 6:41 am
      The 'wind' blew towards the government coffers. But the poor had the cut in subsidies 'fall' on their shoulders.
      1. A
        Jan 10, 2016 at 1:44 pm
        MODI will not go with the wind now. We need to wait up to 2019 .
        1. A
          Ashok Sridharan
          Jan 10, 2016 at 8:56 am
          Mr. Chidambaram has quite conveniently forgotten that the NDA government had had to deal with back to back droughts- the worst in 40 odd years in a country where nearly 60% of the potion depends on agriculture. Quite how he expects any government to devise and implement a plan B given such a mive structural shortcoming is beyond me.
          1. A
            Jan 10, 2016 at 6:32 am
            Why do you forget that as the prices of oil are falling, so is the price of petroleum and oil based products which are one of the main exports of India. What this analysis shows is only one side of the coin.
            1. A
              Anjan Barua
              Jan 10, 2016 at 8:10 am
              When we talk about fall in oil prices and the benefit to the economy one should consider price x volume imported and not only the price for if price halves and volume doubles the impact would be zero. Thus this article is based on a flawed umption . Chidambaram should have known this .
              1. B
                Barb Dewyre
                Jan 10, 2016 at 1:12 pm
                Modi's nuts!
                1. D
                  Deepak Singh
                  Jan 10, 2016 at 1:25 pm
                  RSS/BJP Chaddis will never acknowledge that this Feku Modi Govt is just barely staying afloat fiscally because of the taxes it earned by keeping petrol price high. The revenue so earned has disappeared to ensure thst the GDP figures dont seem abysmal. This Govt which came on the plank of development has failed von all parameters except in their main goal viz. promoting Hindutva.
                  1. D
                    Jan 10, 2016 at 7:13 pm
                    I can well imagine what would have happened if the windfall were used for investment or welfare. The money would have leaked through the various sieves in layers of government. If this "windfall" is used to somehow lower fiscal deficit and control inflation, that should be a much greater help to all of us. There is absolutely no hope that anything that the government does (except building infrastructure) will add any lasting value to the economy. Not in our country, not in any country. This government is already doing plenty for infra, the problem there is the stupid land acquisition build. Forget about this additional amount, even the existing outlays can't be spent. But you already know that, just forgot to mention it, I suppose.
                    1. K
                      K H
                      Jan 10, 2016 at 6:50 pm
                      Dear PC 1) The Govt did not achieve the disinvestment target ? Well no one will sell their stocks when the market is downhill. 2) Agreed crude prices are down. And its a windfall. But why you grudge ? Think magnanimously about the country. During your time petrol and diesel were subsidised for good reasons - but now they are aligned to international markets. During your time the national oil cos. were incurring huge loss. Now they are breathing freely. The wind is not swindled but in public coffers. 3) The subsidies go to the beneficiary directly to their bank account. No siphoning off in-between. This you could have thought yourself. Did you stand up against corruption ? 4) During your period the capacity utilization was very low. Now its going up - once they are more than 80% the capacity will be augmented and more private investment will come. 5) Make in India will bear fruit as Govt insists on manufacturing in the country. Again you could have embarked on that idea. But your idea of India was only naming even a minor stock investment program with a particular name and getting a nod of approval from one person. You felt like a student scoring distinction. 6) TN elections are round the corner. Why dont you give your blue print of economic plan for that state instead of nit picking the Central schemes. Give your g vision on industry, power, water management, river disputes. What is your stand on debilitating Tasmac problem. An entire generation is getting spoiled. Will you bring prohibition (or) reduce Tasmac shops ? No - you dont have time to write in a Tamil newspaper on these matters. 7) Instead of looking for alliance fight on pragmatic and corruption free deliverables. Give a try and best of luck
                      1. D
                        Jan 10, 2016 at 3:17 am
                        If it was UPA, the EVIL Mafia Maid would have stolen all and a few billion dollars would have been distributed to all of you ministers. I know, it hurts your pocket but India's GDP growth for 2015 will be 9%. Cry as much as you want to.
                        1. K
                          Jan 10, 2016 at 6:51 am
                          Its high time PM Modi should appoint a hands-on Minister as the country's FM. This two trillion dollar growing economy need to be ministered by one of the bests in the world!
                          1. G
                            Jan 10, 2016 at 9:09 am
                            A article by a most insincere man in UPA cabinet who had plenty of time to show his capability but just wasted time and money of India. Never raised any voice against the extreme corruption prevailing at that time. His son made millions within very short span courtesy his inside information of market but never got caught. This guy giving lectures to anyone looks most ingenuine and false.
                            1. G
                              Jan 10, 2016 at 8:32 am
                              it is right time to acquire energy ets at current valuations. There is certain to be distress of oil and gas ets around the world. Coal should be taken out of radar. India -come on - India
                              1. R
                                Ramiah gopal
                                Jan 10, 2016 at 7:14 am
                                Your knowledge of economics and particularly of India is rudimentary and does show you have read the article which is written in a simple style for the layman to understand
                                1. G
                                  Gaurav Gupta
                                  Jan 10, 2016 at 4:50 am
                                  Dear PC sir, even after this windfall there was a report in TOI that CAG has pointed out about understating of subsidy bill to the tune of Rs 45000 crore by the govt in FY 15. By this account fiscal consolidation has also gone to the wind. Fudging of figures is in full progress. Overnight GDP was increased by changing the formula your next article pl tell us where is the economy now among below options : In general ward ( only sick) In ICU On ventilator In coma Or even serious Thanks
                                  1. G
                                    Gaurav Gupta
                                    Jan 10, 2016 at 7:24 am
                                    They do not have hands-on-job but do have foot-in-mouth type of people. It's AIB company.
                                    1. H
                                      Harish Advani
                                      Jan 10, 2016 at 6:11 pm
                                      Two points .1 Do you know the meaning of 'manifold'?. 2.Foreign exchange was NOT saved borrowings to finance the import bill have come down.Defict Reduction is the term. 3.The budget deficit was way too high for comfort.This was begining to impact overseas borrowings,interest rates were being kept high to attract funds. Petrol duties/Excise rate levels have been increased to finance Social welfare schemes and invest in infrastructure which was ignored during the UPA2 tenure. Lastly if PC's stewardship of the economy was so wonderful his govt would not have left India with a growth rate of around 4.5% and a plethra of Scams.
                                      1. हेमकांत
                                        Jan 10, 2016 at 6:56 am
                                        Imagine the greater welfare that would have accrued if the budget cuts to crucial programmes had been restored! Oh. this fellow is much worried about the losses to the people, his people, who were benefiting more from the welfare schemes through cuts.
                                        1. S
                                          Jan 10, 2016 at 2:07 pm
                                          The loot of the hapless customer is the best way to describe the situation arising out of falling crude prices. While the international crude prices have fallen by over seventy percent, our petrol prices have declined by just seventeen percent. A day light robbery of this magnitude is difficult to contmplate. A pick pocket gets thrashed for removing a few hundred rupees from an individual's pocket. Here we have a finance minister who has robbed million of several thousand rupees by his refusal to p on the benefit of falling crude prices. Never before have so many lost so much because of the imbecility of their finance minister. May he be replaced soon.
                                          1. H
                                            Jan 10, 2016 at 8:36 am
                                            Before 2104, TIE used to publish Chiddu's articles...bECAUSE....he was in Cabinet. NOW TIE is publishing him BECAUSE he is JOBLESS and badly needs some public exposer....and his friend Shekhar Gupta must oblige. All these are chummy chummys and buddy buddys !!
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