:: Technical --- ID :: 17764
How cheap oil is helping government battle Covid headwinds
How cheap oil is helping government battle Covid headwinds

How cheap oil is helping government battle Covid headwinds

The historic oil price crash in April and a protracted spell of subdued market reduced India’s oil import bill since January by 40 per cent, giving the cash-strapped government some headroom as it battles Covid-induced headwinds.

India paid Rs 2600 billion for 115.5 million tonne (mt) of oil imported in the January-July period against Rs 4200 billion for 130.8 mt in the same period of 2019. In dollar terms, the bill stood at $35.4 billion against $61.3 billion in the previous corresponding period, Parliament data shows.

During the April-July period, or the first four months of the current financial year, the bill stood at Rs 934.66 billion, or 62 per cent lower than Rs 2510 billion in the comparative period of 2019. In dollar terms, the bill stood at $12.4 billion, marking a saving of 65.7 per cent.

To put things in perspective, the Rs 1600 billion saving in the January-July oil import bill is the same as the Rs 1700 billion tab for the Covid relief package announced for the poor in March. Surely, the government does not buy oil. But cheaper oil has a positive impact on macroeconomic parameters, which reduces drag on government finances and frees up resources for welfare.

A recent Barclays note saw every $10/barrel decline in oil price lowering India’s current account trade by $8.5 billion, or shaving 30 bp from current account deficit (per cent GDP) in 2020-21, which keeps the rupee healthy and lifts purchasing power.

Now consider: the price crash has erased LPG subsidy and will lower fertiliser subsidy. This means the government will not have to spend all of the Rs 372.56 billion budgeted for LPG subsidy or Rs 713.09 billion for fertiliser subsidy. The unspent money, for example, can be spent on healthcare.

Cheaper oil allowed fuel tax to be raised for additional revenue without hurting consumers. Excise duty on petrol and diesel was raised by Rs 3 a litre in March when prices began sliding. It was again increased by Rs 10 per litre on petrol and Rs 13 on diesel in May when consumption was still at 50 per cent. But the move is paying off as sales near pre-Covid levels.

In addition, the government used the opportunity to fill the strategic reserve by buying 16.7 million tonne of cheap oil for $19 per barrel in April-May against $60 per barrel price in January, saving $685.11 million, or Rest 50.69 billion, oil minister Dharmendra Pradhan told the Lok Sabha recently.

Admittedly, lower import volumes, prompted by consumption halving because of the countrywide lockdown from March 25 to stem the pandemic, contributed to a lower bill. Import volumes between January and July stood at 115.5 million tonne, down 11.6 per cent from a year ago. The fall was sharper during the April-July period, or 23.6 per cent lower than the previous comparative period.

US benchmark WTI (West Texas Intermediate) crude slipped into negative for the first time in history of oil trading on April 20 and global benchmark Brent slipped below $20/barrel as demand crashed due to lockdowns shuttering economic activities across the world. Then Indian Basket too slumped to $19.9/barrel on cue and has averaged $41 in the January-July period against $65 in the year-ago period

(Source: TIMES TRAVEL 20-09-2020)