The impact of higher oil prices on budget
Excise collections from petrol/diesel do not rise but customs duties, GST, royalties, cess and profit share do, as do the earnings of upstream state-owned enterprises, say analysts
What is the impact of higher crude oil prices on the budget? Take a look at the chart.
It shows the increase in government revenues and government expenditure (or oil subsidy) for every $10 a barrel rise in oil prices. The subsidy on cooking gas and kerosene (fuel products on which the government still compensates after diesel and petrol were deregulated) increases to Rs18,400 crore. But then, higher crude oil prices also bring in higher revenues for the government.
Analysts from Jefferies India Pvt. Ltd write that excise collections from petrol/diesel do not rise but customs duties, GST (goods and services tax), royalties, cess and profit share do, as do the earnings of upstream state-owned enterprises that bring higher corporate taxes, dividends and dividend taxes. “Indeed, these offset ~90% of the impact of higher subsidies leaving the budget largely agnostic to changes in oil prices unlike in the past,” pointed out Jefferies in a report in December.
Nevertheless, the cushion from higher excise duties as was seen over fiscal years 2015-2017 (FY15-17) is no longer available to the government. “An excise duty cut can hurt,” says Gaurav Kapur, chief economist at IndusInd Bank Ltd, adding that a sharp rise in oil prices could prompt the government to resort to cutting excise duties.
According to Madan Sabnavis, chief economist at CARE Ratings, inflation is the most important factor and the government will have to determine the extent to which it is comfortable. “My sense is that the oil subsidy outgo for fiscal 2019 will increase by Rs5,000-Rs10,000 crore assuming the government does not cut taxes, which will assure its revenues,” he added.
Oil subsidies are definitely under pressure and the government is likely to budget higher oil subsidies for FY19, said Kapur.
But of course, a lot depends on how GST revenues pan out.
The Economic Survey says India’s two underlying macroeconomic vulnerabilities— the fiscal and current accounts— both tend to deteriorate when oil prices rise. “Overcoming the fiscal vulnerability requires breaking the inertia of the tax-GDP ratio. It is striking that the centre’s tax-GDP ratio is no higher than it was in the 1980s, despite average economic growth of 6.5 percent, the most rapid in India’s history,” said the survey.
Further and what’s consequential: “The GST could help break this fiscal stasis, with positive spillovers for macro-economic stability,” elaborates the survey, adding that there is evidence of a noteworthy increase in the number of tax filers in the demonetisation-GST period.
For now, firm oil prices are playing the villain. Whether GST will turn out to be the hero that will save us from this menace remains to be seen.