When Finance Minister Arun Jaitley presented his fifth, post-GST era’s first, and present government’s last full Budget on Thursday, he dedicated his little fiscal room to farmers, senior citizens, salaried class, and the SMEs. But, the rising oil prices found no mention — neither in his speech, nor in the budget. On being asked whether he has budgeted the risks of rising crude oil price in an interview on DD News, he replied, “No”.
The price of crude oil in the international market has been on a rising spree for the last three months, with the price of Brent crude oil hovering at over $68 per barrel after briefly hitting $70 per barrel in mid-January. Since October, the Brent price has gone up by $13 per barrel, while petrol and diesel prices, subsequently, shot up by over Rs 3 per litre. According to the Economic Survey report, every $10 per barrel hike in crude oil price affects the GDP growth of 0.2-0.3 percentage points, inflation by 1.7 percentage points, and widens the Current Account Deficit (CAD) by $9-10 billion.
“No. I think, we factor in the price, you know, ideally, we would be very comfortable with anything up to about $60 (per barrel) or so, even if it moves up to the present level, it is a shock we are trying to absorb; though it has some inflationary impact, but if it rises beyond that… up till now we are bearing the shock,” Arun Jaitley said in response to a question if the government has budgeted for rising crude oil prices, in a TV interview.
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But it is highly unlikely that the crude oil price will stay at the current level. London-based consultancy Energy Aspects predicts that besides production cuts and middle-east crisis, new production outside the US shale patch could help to send Brent crude briefly back above $100 a barrel next year. Another report by Citi Group predicted that the oil price may hit at least $80 per barrel soon.
Crude oil price over $60 per barrel brought an end to the three-year-long cheap oil windfall for the Narendra Modi government, which allowed them to hike excise duty on petrol and diesel by Rs 12 and Rs 13.77 per litre before cutting Rs 2 per litre in October last year. And, if crude oil price touches $100, with no Budgeted back-up, it may derail the fiscal plan of the government, which has been fixed at 3.3% of the GDP for FY19 — slightly higher than previous plan of narrowing it to 3%.
“We expect economic growth (7-7.5%) to be around the lower end of the band as higher oil prices are likely to take away some part of growth,” Anis Chakravarty, Lead Economist, Deloitte India said.
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While there was no mention of inflation either, Arun Jaitley did cut excise duty on petrol and diesel, a demand put forth by the oil ministry to cushion the impact of rising crude oil price. But, it was not meant for common people, rather for internal revenue restructuring between the central government and the state governments. “Some of the excise duties, one of the entries, have been shifted into a cess, that is because to balance the central revenues itself, particularly after the GST, central revenues was taking a hit. To consumers, the price impact would be different,” the finance minister said.
The government, in the Budget 2018, cut the excise duty by Rs 2 per litre and additional excise duty by Rs 6 per litre on petrol and diesel and rebalanced it by levying a Road and Infrastructure Cess of Rs 8 per litre. Lesser government revenue on account of low GST collections and the shortfall in non-tax revenue due to deferment of spectrum auction is understood to have left little or no room to factor in the risks of rising crude oil price.
Why oil is on the boil
“The FM, unlike last year, did not discuss the headwinds that may impact the economy in 2018. The impact on inflation due to rising crude prices and higher in MSPs may make the central bank more hawkish as it would like to analyse the final impact of these variables,” Richa Gupta, Economist, Deloitte India said.