Home / Market / Mark-to-market /  The risks to fiscal health from higher oil prices

Global crude oil prices had started falling since mid-2014. It’s well known that the Indian government chose not to pass on the decline in crude prices to consumers in the form of lower retail prices of petrol and diesel. Instead, it raised excise duties over a period of time and used the windfall to improve its finances.

However, with crude prices on a firm footing now, could they pose a fiscal threat?

Higher crude prices will mean increase in subsidies on liquified petroleum gas (LPG) and kerosene. However, higher oil prices bring higher government revenue, too, analysts from Jefferies India Pvt. Ltd noted in a report on 13 December. Excise collections from petrol/ diesel do not rise but custom duties, goods and services tax, royalties, cess and profit share do, as do upstream state-owned enterprises’ earnings that bring higher corporate taxes, dividends and dividend taxes, elaborated the brokerage. Indeed, these offset ~90% of the impact of higher subsidies, leaving the budget largely agnostic to changes in oil prices, unlike in the past, said Jefferies.

For now, government’s finances aren’t looking particularly rosy, considering the uncertainty over how goods and services tax (GST) revenues will pan out, lower dividends from the Reserve Bank of India and lacklustre direct tax collections. Madan Sabnavis, chief economist at CARE Ratings, says, “In the light of higher borrowings announced yesterday, it looks like fiscal deficit will be higher." The issue is that high crude price will pressurize fiscal balance on the revenue side, added Sabnavis.

The higher-than-expected borrowing shock of Rs50,000 crore will mean that the fiscal deficit for the year 2018 as a percentage of gross domestic product, or GDP, is now likely to slip ~50 basis points to 3.7%, according to Kotak Institutional Equities. One basis point is 0.01 percentage point.

But what if crude prices were to rise further hereon? Will the government take another excise duty cut on petrol and diesel then? “A Rs2 excise duty cut on petrol and diesel will mean a revenue hit of Rs25,000 crore a year. We all need to consider that the public expenditure may also increase in the run up to the elections," says Ritesh Gupta, an analyst at Ambit Capital Pvt. Ltd. That’s when the discomfort will begin, unless, of course, revenues from GST surprise positively in a big way.


Pallavi Pengonda

Pallavi Pengonda is a financial journalist producing cutting edge commentary and analysis on companies, economy and market trends. Over her journalism career spanning more than 14 years, she has covered topics across sectors such as oil & gas, consumer, aviation and new age tech companies. She heads the Mark to Market team and joined Mint in June 2010. She lives in Bengaluru. She is an art enthusiast and likes to paint in her leisure time.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout