The steep fall in crude oil prices will help the government to bring down the subsidy bill and narrow 2015-16 fiscal deficit by 20 basis points (bps) of the gross domestic product (GDP), says a report by Bank of America Merill Lynch.
FUEL SUBSIDY TO FALL:
Assuming Brent crude oil price at $81 per barrel, FY16 fuel subsidy is expected to fall by Rs 23,400 crore (20 bps of GDP) to Rs 40,000 crore even as the impact on FY15 remains muted.
$1 BN SAVINGS IN LPG, KEROSENE:
With diesel being deregulated, a $10 per barrel fall in Brent reduces the government’s fiscal subsidy on LPG and kerosene by $1billion (5 bps of GDP).
SUBSIDY TARGET TO BE MET:
The recent drop in Brent prices will allow the government to comfortably meet its FY15 subsidy target of Rs 63,400 crore, possibly with a buffer of
Rs 5,500 crore.
GOVT MAKES MONEY:
The continuing price drop has allowed the government to benefit from increase in excise duties on petrol and diesel that will yield $1.6 billion (8 bps of GDP) of additional revenues in FY15.
UNDER CONTROL?:
Can fear of fiscal slippage be a reason to hold back? It is difficult to see why, given that Centre’s fiscal deficit is already in the 4% of GDP handle. In any case, the Centre has decided to cut both Plan and non-Plan expenditure by 10% to meet the FY15 fiscal deficit target of 4.1% of GDP.
CAD TO DECLINE:
Lower oil prices likely to pull down the current account deficit to 1.1% of GDP in FY15/16 from 1.4% in FY15 and 1.6% in FY16.