By Sunanda Natrajan

Besides the anticipated fears of crude oil prices rising beyond the expected threshold, oil prices found negligible mention in the 2018-19 budget presented by FM Arun Jaitley. A rise in global oil prices has a direct impact on petrol and diesel prices in India, the world’s third-largest oil importer after the United States and China. In his last budget before the 2019 general elections got underway, the Finance Minister voiced out the problems that could arise if the crude oil prices increase beyond their current level at around $70 and its subsequent effects on the country’s two major macroeconomic vulnerabilities—fiscal and current accounts—both of which tend to deteriorate when oil prices rise.

The stance of the 2018 budget

After this year’s budget, the government is worried about the economy going into a downward spiral if the oil prices increase beyond $70 per barrel. FM Arun Jaitley was quoted saying, “I want it to remain below this level. If it goes above this level, since we are a net buyer, it will have an impact on inflation. While we have one eye on monsoon, the other eye is on crude oil prices”. While he speaks of this with much consternation, the budget he presented has little to talk about how the economy will tackle the consequences if this foretelling actually comes true.

Global oil prices have been at an all-time high since 2015, thanks to the continual political tensions between the USA and North Korea along with mass demonstrations in Iran, OPEC’s third-largest oil producer. Oil prices touched a two-year high last week and are estimated to remain elevated for quite some time, owing to several reasons such as on-going geopolitical instability in West Asia, slower pickup in US shale oil and voluntary production cut by OPEC. In light of the 14% increase over the last one month coupled with the internal power struggle in Saudi Arabia, even the IMF has stated that Saudi will have to maintain the price at $70 per barrel to hit fiscal break-even in 2018. Furthermore, London-based consultancy Energy Aspects predicts that new production besides US shale patch could send Brent crude price to $100 a barrel next year.

While there was not much talk about possible inflation, Arun Jaitley mentioned a cut in excise duty on petrol and diesel, as demanded by the oil ministry in order to tackle the impact of rising prices. However, this move is not aimed towards the common consumer and instead attempts to make internal revenue restructuring convenient between states and central government. The government in the 2018 budget cut excise duty by Rs 2/ litre and additional excise duty by Rs 6/litre and rebalanced the same by levying a ‘Road and Infrastructure’ cess of Rs 8/litre. Therefore, the price impact on the Indian taxpayer will be different and of an equal magnitude; possibly even greater.

Micro and macro effects of rising oil prices

With the petroleum sector excluded from the GST framework, petrol and diesel still form a part of the indirect taxes accruable to the Government of India. Even as the “Road and Infrastructure Cess” has come into place, oil prices in New Delhi have already witnessed a three and a half year high of Rs.73.05/litre. Since the excise duty on petrol and diesel has been converted into a cess, there is essentially no change in price for the consumer. It is estimated that if the oil prices continue to remain within manageable limits along with consistent monsoon conditions, then Indian planners envision a greater ambition for the Indian economy.

However, an increase in overall global prices will definitely result in upward inflationary pressure and drastically increase domestic oil prices as well. In the first three-quarters of 20 the 7-18, the price of oil hiked by 16% internationally. Stemming from that, Chief Economic Advisor Arvind Subramaniam stated this week that an increase of $10 per barrel of oil could reduce GDP by 0.2-0.3 percentage points and worsen the Current Account Deficit (CAD) by $9-$10 billion. Attacked with the twin problem of GST and demonetization, the Economic Survey has also projected that India’s GDP will grow at 7-7.5% this year after having accelerated from 6.75% in the previous year.

Oil prices are unregulated in India and Oil Marketing Companies (OMCs) set prices on a daily basis. A UBS research report has predicted that a 10% hike in oil prices, with no cuts in the excise duty, could increase CPI inflation by 25 basis points if the OMCs were to pass on the full increase to the consumers. Therefore, with no budgetary attention or allocation towards this looming crisis, the future of the Indian economy looks slightly bleak.

Featured image source: Pexels

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