With Brent crude falling below $50 per barrel — it touched $49.93 in early trade on Wednesday, the lowest since July 2017 — India could draw some comfort as its extra fuel subsidy bill could prove to be lower than recent estimates and the current account deficit (CAD) for FY19 could be a few billion dollars less than reckoned earlier.
Since the beginning of FY19, crude has been caught up in wider financial market weakness as higher US interest rates, the US-China trade dispute and the US shutdown unnerved investors and exacerbated worries over global growth. The price had touched a peak of $86.29 per barrel on October 3 this year, prompting the Centre to cut excise duty by Rs 1.50 per litre. Public sector oil marketing companies (OMCs) also began absorbing Rs 1 on every litre of petrol and diesel they sell. The steps were aimed at giving some relief to consumers.
“The significant moderation in oil prices observed lately may give a succour to the rising subsidy bill and the additional subsidy burden might be restricted to Rs 11,720 crore, taking the total petroleum subsidy to around Rs 36,353 crore against the budget estimate (BE) of Rs 24,932 crore,” SBI Research said in a recent report.
The recent decline in oil prices might compress the CAD by around $5-$6 billion from earlier estimates of $78 billion in current fiscal, it added. This implies the CAD settling down at 2.6% of GDP rather than 2.8% of GDP projected earlier by the firm. India’s current account saw a deficit of $19.1 billion or 2.9% of the GDP in July-September quarter (Q2FY19) of this fiscal — the deficit had stood at 2.4% in the previous quarter and a benign 1.1% in the year-ago quarter. The widening of the deficit was mainly owing to a big merchandise trade gap of $50 billion, up 50% from Q2FY18, which could not be offset by increases in net receipts from services trade and private remittances.
Rupee depreciation and under-recoveries of oil marketing companies have exerted pressure on the fiscal deficit target of 3.3% of GDP for FY19. In October when crude oil prices hit record high, the ministry of petroleum and natural gas had estimated that fuel subsidy outgo for FY19 could be Rs 47,000 crore, an increase of 88% from the budgeted level. The Indian basket of crude oil price averaged a little over $73/barrel so far in FY19, as against the average of $56.39 in FY18. Indian crude oil basket has come down from the average of $80.08 par barrel in October to $65.40 in November this year.
The excise cuts on petrol and diesel announced by the Centre in October will cost the exchequer Rs 10,500 crore in FY19. Recently, a senior government functionary said that the government might look at restoring the higher duties that prevailed for most part of this fiscal, if the crude softens to a certain level. Till December 25, the Centre has reimbursed Rs 27,286 crore towards subsidy on domestic cooking gas, 9% higher than the total fuel subsidy estimate (BE) for the year.
Crisil Research wrote recently: “We expect the CAD to widen to 2.6% of GDP in this fiscal from 1.9% of GDP in fiscal 2018, driven by a wider merchandise trade deficit. In this fiscal so far (April-October 2018), merchandise trade deficit has been $113 billion, $22 billion higher than in the same period last year due to faster growth in imports (17% average growth April-October 2018) compared with exports (13.6%). If the recent decline in oil prices sustains, import growth will soften, but growth in exports still faces headwinds from weaker global trade growth owing to escalating trade wars.”
(With agency inputs)