In April 2016, the Brent Crude Oil price was just $38.99 per barrel. In one year and eight months, the oil price rose to $67.12 a barrel and is inching towards $70 per barrel, which is also becoming a cause of concern for the government. With rising oil prices, fiscal slippage is not the only concern but it will lead to higher inflation in future.
Recently, a government official told ET Now that rising crude oil price could also be one of the reasons for the fiscal slippage. The official added that the rise in crude oil prices was eliminating the benefit given to consumers in October by cutting excise duty and the VAT in some states.
According to Nomura, every $10 per barrel rise in the price will worsen India’s fiscal balance by 0.1% and current account balance by 0.4 % of GDP. “For a net oil importer like India, a sustained rise in crude oil price would have adverse macroeconomic implications,” it said in a report.
This continuous rise in crude oil prices is putting an end to the three-year Narendra Modi’s dream run, which allowed the government to hike excise duty by Rs 10 on petrol per litre and Rs 12 on diesel. With low GST collections in November and December and fiscal deficit already breaching the 3.2% target, the rise in oil prices will put India in a vulnerable position.
Meanwhile, the government is already struggling on many fronts regarding the fiscal deficit. The government last week announced to borrow additional Rs 50,000 crore via gilts, which is double the amount that was estimated by the market, which could lead to “modest fiscal slippage”.
The government on Tuesday also announced to replace the 8% Savings Bonds Scheme with a 7.75% bond. In wake of lower tax collections and reduced RBI dividend, the government is eyeing to extend its disinvestment target to Rs 1 lakh crore as against the FY18 budget target of Rs 72,500 crore. However, experts say that the record foreign exchange reserves, for the next months, would be able to help India against the rise in crude oil prices.
Here is why Brent crude oil has been rising:
1. On Tuesday, the Brent crude oil price jumped 25 cents up as anti-government protesters demonstrated in Iran on Sunday in defiance of a warning by authorities of a crackdown, extending for a fourth day.
2. On December 12, the Brent crude oil price jumped up by 0.9% after the shutdown of the Forties North Sea pipeline knocked out significant supply from a market that was already tightening due to OPEC-led production cuts. Forties North Sea, which delivers the crude oil, is likely to be shut for weeks to carry out repairs to an onshore section of the line. The New York blast was also the reason behind the jump in the oil prices.
3. OPEC and non-members led by Russia decided to extend cuts in oil output until the end of 2018 from March 2018 earlier, as they battle a global glut of crude after seeing prices halve and revenues drop sharply in the past three years. The producers are currently cutting supply by about 1.8 million barrels per day (bpd) in an effort to boost the price.
4. Fears of trade union strikes in Africa’s largest oil exporter also led to a jump in oil prices. One of Nigeria’s main oil unions threatened to go on strike from December 18 over what it said was a “mass sacking of workers.” The country is Africa’s top oil exporter.
5. The Iraq-Kurdistan conflict also led to the surge in crude oil prices. The conflict began shortly after the Iraqi Kurdistan referendum in 2017 held on September 25. The diplomatic crisis between the Iraqi Government and the Kurdistan Regional Government (KRG) escalated into a conflict, which resulted in the Battle of Kirkuk (2017). The conflict led to the Iraqi Kurds’ consequential loss of Kirkuk’s oilfields as their main source of revenue.
6. In November it was reported that Saudi Arabia planned to cut crude exports by 120,000 barrels per day (bpd) in December from November, reducing allocations to all regions, which led to jump in oil prices. The reported corruption crackdown in Saudi Arabia also led to fears of destabilisation in the region, making the crude oil price surge.
The rising demand by countries like the United States and China and tighter supplies may even push the oil prices to $70 per barrel. In fact, the Saudi break-even oil price to achieve zero deficit in 2017 is $73.10, according to the International Monetary Fund.