Photo: Hindustan Times
Photo: Hindustan Times

Falling crude prices may help meet deficit target

The price at which India buys crude oil fell below $90 a barrel, increasing prospects of the government meeting its fiscal deficit target for 2014-15

New Delhi: The price at which the country buys its crude oil, called the India crude basket, fell below $90 a barrel on the back of a subdued global economic recovery and lower fuel demand, increasing prospects of the Narendra Modi government meeting its fiscal deficit target for 2014-15.

Even better, lower oil prices could ensure that inflation remains low and serve as a cue for the Reserve Bank of India (RBI) to reduce interest rates, a move that could provide a fillip to growth.

The international crude oil price of the India crude basket, computed by the petroleum planning and analysis cell, was $88.23 per barrel on 10 October compared with $90.50 per barrel on 9 October, the oil ministry said in a statement on Monday.

Some analysts are already beginning to talk of crude oil prices coming down to between $80 and $85 a barrel.

Saudi Arabia was “quietly telling oil market participants" that it is comfortable with lower oil prices “for an extended period", Reuters reported on Monday.

The “sharp shift in policy may be aimed at slowing the expansion of rival producers including those in the US shale patch", the report by the news agency said.

Saudi Arabia is the largest producer of Opec, or Organization of the Petroleum Exporting Countries. Opec has traditionally countered lower prices by reducing output.

Lower crude prices reduce the burden of oil subsidy on the government and that means a lower fiscal deficit. It also leads to a lower import bill, which partly offsets inflationary pressure and helps reduce the current account deficit. Lower demand for dollars for oil imports may also provide some respite to the rupee against a potential tightening by the US Federal Reserve and the ongoing appreciation in the US currency.

Oil prices could move either way depending on geo-political developments, International Monetary Fund (IMF) said last week. “An immediate risk relates to disruptions to oil production owing to escalating geopolitical tensions, particularly in Iraq, Libya, and Yemen. Activity in these countries could contract in response to such disruptions, should they materialize. Such disruptions could also lead to higher oil prices and lower global growth," it said.

Oil prices could also turn out to be lower than expected because of increased oil supply or lower demand, IMF said. “On the supply side, Libya’s oil production could recover earlier than expected, the sanctions-related restrictions on the Islamic Republic of Iran’s oil exports could be relaxed, or US oil output could continue to surprise on the upside."

IMF projected crude oil prices to average $102.8 a barrel in 2014 (down 1.3% from 2013), falling to $99.4 in 2015 and to $97.3 in 2016. “This pattern is consistent with strong increases in non-Opec production."

Finance minister Arun Jaitley, who stuck to the “challenging" 4.1% of gross domestic product fiscal deficit target set by his predecessor, has not got much support from revenue generation, with both direct and indirect tax collections so far remaining below budgetary targets. Although Jaitley has an ambitious disvestment target and a still bullish market, the stake sales in public sector units are yet to take off.

This is the right time for the government to free diesel pricing, said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy. “Deregulating the diesel price at this moment will lead to a lower price, thus increasing the absorptive capacity of consumers in the long run," he said.

With oil prices easing, the 4.1% fiscal deficit target now looks achievable, said Devendra Pant, chief economist at India Ratings and Research. “If oil prices remain at similar levels, the government could make a saving of around 12,000 crore in the fuel subsidy bill in the current fiscal year," he said, adding that freeing of diesel prices will also help the government.

The government has estimated the fuel subsidy bill at 63,500 crore in this year’s budget, assuming oil prices to be around $110 per barrel.

“Oil is the main contributor to the import basket. Easing of oil prices will give a relief on the current account deficit front. With capital inflows likely to keep up, it will also help the rupee appreciate from its current levels," Pant said.

The rupee closed at 61.11 to a dollar, up 0.38% from its previous close of 61.34.

The government has set up an expenditure management commission headed by former RBI governor Bimal Jalan to review the major areas of central government expenditure and to suggest ways to create fiscal space required to meet developmental expenditure needs without compromising on fiscal discipline. The commission is expected to submit its interim report before the budget 2014-15, with some of the measures expected to be incorporated in it.

Bhanumurthy said the government should not wait for the recommendations of the Jalan committee and should go ahead and deregulate diesel pricing.

Cooling oil prices will also help the government compensate for the expected shortfall in tax revenue. With the economy growing at a slow pace and manufacturing activity still subdued, tax collections, especially corporate tax and excise duty collections, have not kept pace with the budgetary targets.

In the first six months of the financial year, while gross direct tax collections have grown at a reasonable pace of 15%, more refunds have ensured that net direct tax collections grew at only 7% to 2.68 trillion.

The government has budgeted collecting at least 7.36 trillion in direct taxes in 2014-15, a growth of 15.7%.

On indirect taxes, the situation is even worse. The government has budgeted that indirect tax collections will grow at more than 20%. However, in the first five months of the year that began on 1 April, indirect tax collections have only grown by 4.6% to 1.85 trillion. While excise and customs duty collections have registered only a marginal growth of 0.5% and 0.3%, respectively, service tax collections grew 15%.

Those numbers won’t change anytime soon.

Factory output in August rose a mere 0.4%, unchanged from July and down from 3.94% in June, data released on Friday showed.

Crisil Research said in a report released on 8 October that it expects Indian companies to report a revenue growth of 9-10% in the September quarter, lower than 13% growth reported in the June quarter, due to slower growth in export-oriented sectors and continued weak performance of investment-linked sectors.

The forecast is based on an analysis of 600 companies, excluding financial services and oil companies, representing 71% of the overall market capitalization of Indian firms.

Reuters contributed to this story.

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