The decision of the OPEC+ to announce the sharpest cut in oil output since 2020 from November to shore up international energy prices and the weakening rupee pose fresh upside risks to India’s inflation and current account deficit (CAD), economists told FE.
However, they see only limited risks of the OPEC+ move disrupting Indian government finances, as the Centre no longer offers subsidy for petrol and diesel, and the dole-out on LPG and kerosene is not significant. But the risks to the government’s balance sheet are going to be driven more by a slowing economy and additional spending commitments than by the short-term oil price rise, some of them said.
Moreover, global commodity prices (other than oil) are likely to moderate further even in the short term, as demand gets battered by aggressive interest rate hikes by key central banks. This may ultimately drag down global oil prices as well, despite supply cuts by some producers. Of course, the rupee depreciation will somewhat offset the gains from the easing commodity prices. On Friday, the domestic currency hit a fresh low of 82.23 against the dollar.
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OPEC and non-OPEC allies, known as OPEC+, on Wednesday decided to cut oil production by two million barrels per day from November. It’s aimed at staging a recovery in oil prices, which had fallen by over $30 a barrel from more than $120 three months ago.
Several economists now expect inflation to ease to 6%, or the upper band of the central bank’s tolerance level, only between December 2022 and March 2023, and not before. Retail inflation revered a three-month declining trend in August and inched up to 7% from 6.71% in July. Meanwhile, they forecast the CAD to exacerbate to 3-3.5% of GDP in FY23, against 1.2% in the last fiscal, citing elevated trade deficit and weak rupee.
Economists at Nomura expect retail inflation to remain in the 6-7% range until the March quarter. It forecast that there’s “increased vulnerability from upside inflation risks like the spike in cereal prices, persistence in core inflation pressures, or second-round effects from elevated inflation expectations and higher rents and wages”.
As for slowing growth, the World Bank on Thursday slashed its FY23 India forecast by 100 basis points to just 6.5%, presenting the gloomiest projection among key agencies, as it cited the Ukraine war and external headwinds. A number of agencies have revised down their forecasts after the June quarter GDP data had trailed most predictions. The forecasts now range from 6.5% to 7.4% for FY23.
ICRA chief economist Aditi Nayar said, crude oil prices may remain elevated in the winter months, following the production cuts by OPEC. “(But) unless excise duty is cut further, which is not our base case, or support is extended to the oil-marketing companies, the direct impact on the Budget may be muted. The impact on inflation will depend on how soon, and by how much, the retail selling prices of fuels are changed.”
DK Pant, chief economist at India Ratings, said elevated energy prices will “certainly” add to inflationary pressure but added that LPG and kerosene subsidy is unlikely to impact fiscal arithmetic significantly. Of course, the expectations of higher-than-budgetted revenue mop-up will be a “buffer” against higher food or fertiliser subsidy or any additional spending pledge. However, Pant stated that current tax collection growth trend is unlikely to sustain in the second half of this fiscal.
Analysts are, however, divided over the issue of the Centre breaching its FY23 fiscal deficit target of 6.4% of GDP.
Recently, the government extended a free ration scheme by another three months, in effect, taking an additional burden of Rs 44,762 crore.
Nayar said there are several “upside risks” to the fiscal deficit target of Rs. 16.6 trillion (6.4% of GDP) for FY23, emanating from the need for additional spending on food and fertilizer subsidies, the revenue loss to the Centre on account of the excise duty cut, etc.
However, a large part of this would be absorbed by higher-than-estimated non-excise taxes, savings on account of lower wheat procurement and the windfall tax on domestic crude oil output and export duties on petroleum products. The gains will limit the extent of the overshoot in the Centre’s fiscal deficit in FY23 relative to the budget estimates to around Rs 1 trillion, she said.
Despite about Rs 1 trillion tax revenue loss due to a reduction in excise duty on petrol-diesel and import duties on select raw materials, the centre’s net tax revenues could exceed the FY23 budget target by about Rs 2 trillion due to buoyancy in direct taxes and goods and services taxes, sources said. On the non-taxes side, dividends from CPSEs could also exceed the budget target by Rs 10,000-20,000 crore in FY23.