1. Brent crude hits two year high at $60 per barrel; will it reduce India’s fiscal space?

Brent crude hits two year high at $60 per barrel; will it reduce India’s fiscal space?

Rising Brent crude price which opened above $60 per barrel on Monday, close to its highest level since July 2015, may spell trouble for the Modi government as it may leave lesser fiscal space to go ahead comfortably with its plans to revive the economic growth.

By: | Published: October 30, 2017 11:16 AM
Diesel, Indian Oil, HPCL, BPCL Fuel prices are likely to rise despite recent excise duty cut as Brent crude, the global benchmark for oil trade, opened above per barrel on Monday. (Image: Reuters)

Fuel prices are likely to rise despite recent excise duty cut as Brent crude, the global benchmark for oil trade, opened above $60 per barrel on Monday, close to its highest level since July 2015. It has gone up by 36% since its lowest in June this year.

India imports 82% of its total oil requirement and Brent crude oil makes up around 28% of India’s total imports. The Indian crude oil basket is calculated on the average prices of Oman and Dubai sour crude price benchmark and the Brent sweet crude price benchmark. With Brent crude oil price going up, it is likely that fuel price in India will go up as well. Since July, the Indian Basket Crude Oil price has surged drastically, forcing the central government and some state governments to cut taxes.

(Data: Petroleum Planning and Analysis Cell)

Expressing concern on the rising Brent crude oil price, Kotak Mahindra Bank CEO Uday Kotak said that it would reduce India’s fiscal space and leave lesser room for interest rate cuts in future.

On October 4, the Reserve Bank of India kept the repo rate unchanged, expressing concern over rising prices of crude oil among others. “Although the domestic food price outlook remains largely stable, generalised momentum is building in prices of items excluding food, especially emanating from crude oil. The possibility of fiscal slippages may add to this momentum in the future,” the central bank had said.

India is currently facing the challenge of reviving the economic growth which slumped to a three year low in the second quarter of the current fiscal to 5.7%. The central government is also in the middle of massive bank recapitalisation plan of Rs 2.11 lakh crore even as the fiscal deficit has touched 96.1% of the total budgetary allocation in September.

JP Morgan economist Sajjid Z Chinoy has said that India’s growth was largely impacted from oil whose nature was transitory and temporary. However, DBS has said that in situations of external vulnerabilities like rise in the crude oil price, India’s foreign exchange reserves, which touched a record $402.5 billion in September, are high enough to cushion the country.

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