Crude reality of budget
The budget math of North Block seems to be going haywire weeks before finance minister Arun Jaitley places his annual financial statement in Parliament as global crude prices rule at a three-year high. Prices could harden further as Opec, the oil producing cartel, has decided to extend its output cut, while non-Opec nations and the US are unlikely to ramp up output, leading to some supply deficit.
While US West Texas Intermediate crude recently broke through $60 a barrel for the first time since June 2015, Brent crude futures crossed $67 for the first time since May 2015 during trading. As a net importer of crude oil, the rising price of oil does not bode well for India. It could hurt the current and the fiscal deficits, increase the costs for various products and services resulting in inflation, affect corporate profits and even turn the investment sentiment negative.
The price of India's crude oil import basket was $61.32 in November, up from $52.49 in March, according to the oil ministry's Petroleum Planning and Analysis Cell. Data from the US Energy Information Administration indicates a slight supply shortfall of 180,000 barrels per day for the first quarter of 2018. Opec and Russia started withholding production last January and the current schedule will continue through 2018. If crude oil prices continue to remain beyond $60 and even breach the $70-mark, as is being predicted, it would mean economic growth would slow down considerably.
It would also lead to a huge increase in the oil import bill. In the current fiscal, the import bill is likely to go up to $90 billion from $72 billion in the last fiscal, and an even lower $64 billion in 2015-16. At current demand levels, India will have to spend around Rs 100 billion more annually for every one dollar increase in crude prices, according to estimates. Besides, the government will have to forego the windfall revenues from excise duties that were possible when oil prices had fallen from $114 in 2014 to $47 in January 2015.
Unless there is a cut in excise and customs duties, the cost of oil to consumers will shoot up enormously. It will also push up inflation. The spike in crude would also curb government spending. In the last budget speech, Jaitley had said the government would raise capital investment by 25.4 per cent, hoping this would lead to a multiplier effect in the economy. Around Rs 2410 billion was promised as spending in rail, road and shipping.
As the forthcoming budget is the last full-fledged one before the next general election, the government is expected to adopt populist measures, especially to woo the rural electorate. However, the advantage of low crude prices in calculating budget numbers will be absent this time and it will require more than luck to wade through the adverse global situation.