Policy

Rising oil prices may put pressure on the Budget

Richa Mishra New Delhi | Updated on January 27, 2018 Published on December 31, 2017

Finance Minister will have to balance between fiscal deficit challenges and industry demands for sops

‘The joker in the pack’ for Arun Jaitley’s critical Budget (2018-19) will be crude oil prices, which had helped in play with numbers and subsidies during his previous Budgets.

With oil prices already breaching the $60 a barrel mark for the current fiscal and a quarter still to go, the Finance Minister may have do some financial jugglery if he wants to turn this to his advantage and present a Budget that would get votes.

So what will be the average price band that would keep Jaitley in his comfort zone as he deals with the challenges of fiscal deficit and GST after-affects, among others, if he wants to keep the commitment towards social and infrastructure sectors? Will it be $65 a barrel or closer to $70 a barrel?

For the current fiscal year, the government had factored in a price band of $56-60 a barrel, which has already been breached and anything beyond would put pressure on the numbers. Those within the government say it has to be higher than $65 a barrel. Some trying to second guess the Finance Minister say, it will be about $67 a barrel.

While Jaitley has a fortnight to close in on his average price range, the price at which Indian refiners are buying the crude oil on December 28 stood at $64.52 a barrel. The average price for April (2017-18) was $52.49 a barrel and in November it stood at $61.32 a barrel.

According to K Ravichandran, Senior Vice-President and Group Head - Corporate Sector Ratings, ICRA, the spike would lead to increase in the working capital requirements and short-term debt levels of oil marketing companies, thereby negatively impacting their profitability.

Further, if public sector undertakings are directed to share a part of higher gross under recoveries, it could be a key negative for their profitability, he said adding that “higher crude oil prices would also test the government’s resolve to keep prices of auto-fuels at market-determined levels, which would have material implications for private marketers.”

India imports over 80 per cent of its crude oil requirements. From April till November 2017, the country’s import bill stood at $53.1 billion, while the estimated bill for the fiscal is close to $80 billion.



Excise duty



If crude oil prices continue to flare, will Jaitley cut the excise duty on petroleum products, a politically right move to cushion the impact of flaring prices at the retail end, or not is another question being asked?

Though putting a GST rate for petroleum products is still a point of contention between the States and the Centre, the alternative before him is to play with excise duty or crude oil cess.

In October, the government had reduced the basic excise duty on petrol and diesel by ₹2 a litre. The Finance Ministry was also quick to point out the revenue loss that the Centre would incur on account of these reductions in excise duty — the loss would amount to ₹26,000 crore for the whole fiscal, and about ₹13,000 crore for the remainder of the current financial year.



Industry demand



Given the glaring fiscal deficit challenges, and spike in crude oil prices, whether Jaitley will be able to meet the industry expectations of addressing existing issues like incentives for the gas sector — gas infrastructure, gas imports, LNG terminals and push for alternative fuels like ethanol, bio-diesel and now methanol in his Budget — remains to be seen. Expectations are also running high that he may say something about Pradhan Mantri Ujjwala Yojana — subsidised LPG distribution scheme for BPL families — as well as DBT of LPG subsidy.

While crude oil prices continued to trouble the industry and the government alike, the government went ahead with the new Hydrocarbon Exploration Licensing Policy for award of hydrocarbon acreage — Discovered Small Field Policy bids round one. The government also introduced a new kid on the block in India’s hydrocarbon space: Open Acreage Licensing (OAL). The National Data Repository, a pre-requisite for OAL, was also unveiled.

On the gas infrastructure front, some of the initiatives include National Gas Grid (Pradhan Mantri Urja Ganga), promotion of CNG/LNG in the transportation sector, proposal to introduce Bharat Stage-VI grade fuel in Delhi from April 1, 2018.

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Published on December 31, 2017
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