Home / Markets / Mark To Market /  Why India cannot cheer oil price fall wholeheartedly this time

NEW DELHI: The windfall gains associated with a massive decline in global crude oil prices may not materialise this time for India in entirety.

Brent futures dropped to $36 per barrel in early deals on Monday, falling nearly 30% in a single session. Brent had traded around $50 per barrel a month ago.

If these levels sustain, it would surely reduce the import bill of India and therefore the current account deficit by a big margin.

By extension, it would also reduce pressure on India’s headline retail inflation. This is good news for the Reserve Bank of India (RBI) as it hasn’t been able to cut policy rates due to the expected rise in retail inflation. Now it could get more motivation to slash rates in the coming policy meet.

But that is all the good there is to the oil price fall.

To start off, in earlier episodes of oil price fall, the government had a windfall gain through lower subsidy outgo as the fuel subsidy bill was hefty. That meant that fiscal deficit could be curtailed. However, this time around there has not much subsidy given to oil companies to begin with. For FY20, the government estimates subsidies at 38,568 crore and for FY21 it is budgeted at 40,915 crore.

“There is unlikely to be a net positive effect on the fisc from the oil prices fall, if this sustains. There are several offsetting factors involved," said A. Prasanna, economist at ICICI Securities Primary Dealership Ltd.

Of course, the government has the option to increase excise duty on petroleum, Prasanna argued, citing that this has been done in the past. That would mean additional revenue.

But these are times when the economy going through a slowdown and demand conditions have been subdued. To impose taxes on fuel would be risky. But even if the government taxes fuel to get boost revenue, state-owned oil producers are bound to get hit by the price fall globally. That would mean depressed earnings and lower dividends. Already refining companies have been facing margin pressure due to subdued demand.

The earnings of not just companies but Indians employed abroad too could see an impact. Middle East countries that are predominantly oil-based economies are at a serious risk from the sharp fall in crude. These countries account for more than half of remittances to India. To be sure Opec has in the past resorted to production cuts to arrest the fall in oil prices and could do so again. Even then the impact on the economic growth of these countries cannot be ignored. That said, the impact on remittances could be lagged, economists said.

For every positive effect of the oil price fall, there seems to be an offsetting impact elsewhere for India. The dive in oil prices is not a positive linearity anymore.

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