As the date for the Union Budget 2018 nears, the Brent Crude Oil price, which hit $70.05 on Friday, highest since November 2014 — as anticipated by experts — on the back of global geopolitical risks, higher demands and production cuts, is likely to upset the fiscal math of Finance Minister Arun Jaitley. The oil rice escalated nearly $15 in just three months.
Moreover, it is further going to push up the inflation, which has already breached Reserve Bank of India’s 4% target. With rising oil prices, the repo rate cut by the central bank also looks unlikely, further impacting country’s investments and production cycle.
The impact of excise duty cut of Rs 2 per litre on retail fuel, announced in October, has completely reversed due to the steep rise in the crude oil prices. The petrol price in Delhi is back at Rs 70 per litre and the diesel price at Rs 60 per litre, prices that were seen before the move. The continuous rise in crude oil prices is putting an end to the three-year-long windfall, which allowed the government to hike excise duty by Rs 10 on petrol per litre and Rs 12 on diesel.
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.
The Union Budget: Where we are
The last full Budget of the present government will come at a stressful time. In the post-GST era, there are disruptions, which are yet to completely fade away. The government, itself, has projected a four-year low GDP growth in the fiscal year 2017-19, as the GST disruptions and a bad agriculture year led to a bleeding economy, especially in the year.
With impending General Elections in 2019 and eight state elections in the current year, Finance Minister Arun Jaitley has to walk a fiscal tightrope, between populist and reformist budget. According to Arun Jaitley, RBI governor Urjit Patel had flagged the risk of farm loan waivers in a letter to the chief election commissioner. He mentioned the risk of promising loan waivers that affects the banking sector as well as the state finances.
Moreover, promises made during the first two years of the government also put pressure, whether it is corporate tax rate cut or a big push to the infrastructure sector.
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. The government is already struggling on many fronts regarding the fiscal deficit. The government recently announced to borrow additional Rs 50,000 crore via gilts, which is double the amount that was estimated by the market. It also announced to replace the 8% Savings Bonds Scheme with a 7.75% bond.
In fact, the government had to turn to the RBI for an additional dividend of Rs 13,000 crore. The government is also in the middle of a massive Rs 2.11 lakh crore bank recapitalisation plan, of which Rs 76,000 crore will be from the Budgetary allocation. However, experts say that record foreign exchange reserves at $410 billion would be able to help India against the rise in crude oil prices, at least for next 9 months. Arun Jaitley will present the Budget on February 1.
Why oil is on the boil
Citigroup Inc predicts that wildcards including war, Middle East tensions, Donald Trump and Kim Jong Un driving crude toward $80 a barrel. However, the most wide-ranging systemic risk to commodities this year could be President Trump disturbing the political world order, Bloomberg quoted Citigroup as saying.
US President Donald Trump has shifted the focus to geopolitical risks, with his pursuit of sanctions on Iran and North Korea potentially having significant consequences. The rhetoric from and toward North Korea has also escalated in the past few months, carrying the “non-negligible risk” of turning into a military conflict. Stockpiling of strategic goods such as crude may accelerate with the risk of war.