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Oil, naseeb and the economy

Consumers save on fuel, govt on subsidies; both left with more money for better spends.

Written by Harish Damodaran | New Delhi |
Updated: February 6, 2015 12:51:03 pm

When Prime Narendra Modi at a poll rally on Sunday pointed to how his taking over the reins at the Centre had brought “luck” to the country vis-à-vis international oil prices, he wasn’t exaggerating one bit.

Between May 26 and now, the average cost of crude imported by Indian refineries has more than halved from $108.05 to $53.83 a barrel. In fact, it had fallen as low as $43.36 a barrel on January 14, before rallying since on news of US oil companies slowing down drilling activity and the likes of BP announcing steep capital spending cuts.

But even a halving of prices — courtesy naseeb or otherwise — would translate into a remarkable turnaround in India’s macroeconomic fortunes, not to speak of household and industrial consumers. When it comes to macro fundamentals, the first positive impact is on the Centre’s finances. In 2012-13 and 2013-14, the total under-recoveries to state-owned oil marketing companies on sale of petroleum products — which has to be borne by the Centre either directly as subsidy or lower dividend revenues — amounted to Rs 1,61,029 crore and Rs 1,39,869 crore, respectively.

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But today, the under-recoveries on diesel (Rs 92,061 crore and Rs 62,837 crore in the two years) have been wiped out, even as the Centre has de-controlled prices of this fuel. Even with regard to LPG and PDS kerosene, the under-recovery on the former is now only Rs 161.81 per cylinder (against Rs 678.54 only a year ago) and Rs 14.14 per litre (Rs 36.59 a year ago) for the latter. If the current global prices hold, total under-recoveries for the next financial year may not amount to even Rs 20,000 crore.

According to a Deutsche Bank research note published last month, even assuming an average Brent crude price of $74.3/barrel, the Centre’s budgeted oil subsidy will be only Rs 28,600 crore in 2015-16. Compare this to Rs 96,879.87 crore and Rs 85,480 crore in 2012-13 and 2013-14 respectively. Either way, we are talking of annual subsidy savings of Rs 75,000 crore or more.

But it is not expenditures alone.

The Centre at present imposes a specific (i.e. a fixed Rs per litre rather than an ad valorem percentage) excise duty on both petrol and diesel, which protects its revenue interests even in the event of prices falling. Since the Modi government’s taking office, the retail price of petrol in Delhi has declined from Rs 71.41 to Rs 56.49 a litre, while correspondingly dropping from Rs 56.71 to Rs 46.01 for diesel. These would have fallen further, but for the Centre simultaneously hiking the specific excise duty by Rs 7.75 a litre on petrol and by Rs 6.50 a litre on diesel.

Taking annual diesel and petrol consumption at around 8 crore kilo-litres and 2.5 crore kilo-litres respectively, the total revenue gain for the Centre from the increased excise levy on these two products alone works out to over Rs 71,000 crore. In all, Modi’s naseeb with oil has delivered a Rs 1,45,000 crore-Rs 1,50,000 crore full-year bonanza to the Centre in subsidy savings and additional revenue.

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The other major macroeconomic spinoff from cheaper oil is, of course, is on the country’s balance of payments. India annually imports 190 million tonnes of crude oil, equivalent to 1,390 million barrels (1 tonne=7.3 barrels).

A $50 per barrel lower price, thus, translates into reduced forex outgo of $69.50 billion. Given that India recorded a current account deficit of $32.4 billion in 2013-14, crude at $50-55 per barrel levels opens up the prospect of surpluses in the balance of payments.

That, in turn, portends a stronger rupee, further reinforcing disinflationary pressures in the economy. And lower inflation makes it easier for the Reserve Bank to slash interest rates.

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First published on: 05-02-2015 at 12:47:55 am

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