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3 reasons rising oil prices bother India
The government deregulated fuel prices and increased excise duty in the wake of low crude oil prices since FY14. It boosted the government’s indirect tax revenue. However, a surge in oil prices is straining India’s already burdened fiscal space. Upcoming elections and continued increase in oil prices will affect the policy decisions, thereby impacting the overall economic growth.
Read on to understand how rising oil prices will affect the economy
Here are three things to note:
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Fiscal policy under weather:
In the light of FY19 elections, the government is likely to focus more on stabilising prices instead of protecting revenues. Higher oil price would increase the subsidy burden on government leading to an increase in the budgeted fiscal deficit. Additionally, the government will have to reduce the excise duty to lower the prices for the end consumer. This decision will lead to a revenue loss and a slippage in the fiscal deficit. It is likely to be 3.5% against the budgeted 3.3%, according to Kotak Securities estimates.
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Inflation could rise:
Petroleum products form 3.4% of consumer price index (CPI). An increase of US $10/bbl would increase the average CPI inflation by around 50 bps in FY2019. With general elections due in May 2019, an incumbent government will find it difficult to avoid intervention. Since prices of petrol and diesel are deregulated, they would cut excise duty and minimize the impact on consumer price inflation.
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Rupee could slip further:
Balance of payments (BOP) is a balance of all international transactions of a country. Increase in fuel prices will not only widen the current account deficit but also impact the BOP negatively due to higher imports than exports. As a result, the rupee is expected to remain weak. Considering the higher imports and a widening current account deficit, the impact could be inflationary on the economy.
To ensure economic growth, the government is expected to continue its spending on sectors like roads, housing and infrastructure. An increased foreign participation in this spending could be helpful.
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Rs 25,000 crore
The budgeted subsidy burden for FY2018-19 is Rs 25,000 crore. If oil touches the rate of $ 70/bbl, this subsidy is expected to rise by Rs 10,500 crore adding to the overall fiscal burden. The political calendar is unlikely to help ease any fiscal stress.
