Macro Economy

Budget 2016-17: Centre to bet on low oil prices to meet pay panel/OROP bill

| | Updated on: Dec 21, 2015

May prune fiscal deficit target to 3.5% of GDP to keep public spending up

Budget making for 2016-17 is not going to be easy, with the Centre staring at large outgoes on account of the implementation of the Seventh Pay Commission recommendations and the One Rank One Pension scheme.

Further, it is also firm on continuing its spending momentum to prime the economy.

While the government deciding to push back the 3-per cent fiscal deficit target by one year will provide some cushion, a godsend has been the low crude oil prices, especially in the backdrop of disappointing tax mop-up and disinvestment receipts so far this fiscal.

As a senior Finance Ministry official said: “We expect crude oil prices to remain low in 2016-17 and so we will continue to push public spending.” On fiscal deficit, Minister of State of Finance Jayant Sinha said the Centre is likely to prune it to 3.5 per cent of GDP in the 2016-17 Budget and 3 per cent in 2017-18.

The key factor, according to Finance Ministry sources, is that for Budget 2016-17 the government will assume the crude price much lower than the $69/barrel taken for the current Budget, in keeping with the subdued international prices.

The Indian crude basket — that is, the price at which Indian refiners buy oil — averaged $51.72 a barrel from April till December 18. This meant a lower crude import bill. For the April-November 2015 period, it was ₹3,11,660 crore versus ₹5,35,111 crore during the corresponding previous period. The import bill for fiscal 2014-15 stood at ₹6,87,416 crore. But one downside of the low crude price is that the country also earns less from the export of petroleum products. In April-November 2015, their exports fetched ₹1,26,226 crore against ₹2,20,351 crore in the corresponding previous period.

Another is the rising consumption though this may not have a direct correlation because demand can go up, for instance, because of more vehicles hitting the road. But demand for petrol and diesel did go up nearly 4.3 million tonnes in April-October 2015 over the same period of 2014, according to the Petroleum Planning and Analysis Cell.

This coincided with the fall in crude oil prices.Sceptics also question the wisdom of assuming a low crude price. They point to OPEC Secretary-General Abdalla Salem El-Badri’s recent observation that “I have seen several oil price cycles and this is one of them. The low prices will not continue. In a few months to a year this will change.”

However, with Brent crude hitting an 11-year low of $36.17/barrel, the Centre is sure to see the benefit of low fuel prices kicking in this fiscal itself when it revises the estimates. With the US also set to sell its oil output and no signs on the horizon of a pick up in the global economy, the Centre may not be erring if it assumes the crude price at under $50/barrel when making Budget 2016-17. The saving in the import bill should cover the expected outgo of ₹1.35 lakh crore on account of the implementation of the Seventh Pay Commission recommendations and OROP.

No wonder the Finance Ministry was emboldened to seek an additional expenditure of ₹56,256 crore in the Second Supplementary Demand for Grants though it hopes to rope in States and the private sector to crowd in investments.

Published on January 22, 2018

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