The government had, however, accounted for crude prices in the range of $55 a barrel for 2017-18, keeping the petroleum subsidy bill at Rs 25,000 crore in 2017-18 budget, compared to Rs 96,879 crore in FY13 (see chart: Crude gains). Industry sources claim that LPG (cooking gas) subsidy, which was expected to be about Rs 13,000 crore, is set to increase to around Rs 15,000 crore due to the recent hike in crude prices. For the first six months of the financial year,the cumulative subsidy claims on LPG and kerosene submitted to the petroleum ministry stood at Rs 9,079 crore; now it is set to increase further.
Consumers have felt the pinch as well: since October last year, prices of non-subsidised LPG have zoomed 59 per cent to Rs 742 per cylinder in November, while prices of subsidised cylinders increased by 16 per cent to Rs 495.69 per cylinder.
According to a report by CARE Ratings, the recent OPEC decision will have a short-term impact on India as the country imports 4.2 million barrels per day, 80-85 per cent of its total consumption. It believes that prices will not cross $65 a barrel as rising US inventories and production will keep it at bay.
“There are some triggers like tensions in Saudi Arabia, Iraq, the financial crisis in Venezuela and popular perceptions about inflationary pressure in the US. In addition to this, the compliance level on the OPEC cut that has been announced has been reasonably good. My feeling is that going forward, prices should remain in the region of $57-65 a barrel,” said M K Surana, chairman and managing director, Hindustan Petroleum Corporation.
This is important for the overall economy as at the macro-level, with imports of 1,575 million barrels of crude oil on an annualised basis, a dollar increase in prices on a permanent basis would increase the import bill by roughly Rs 10,000 crore on an annual basis. According to a Niti Aayog report, India’s import bill was $70 billion in 2016-17, about 21 per cent of the gross import, against $113 billion and $143 billion for the years 2014-15 and 2013-14, respectively. The drop in the import bill was mainly due to a drop in international crude oil prices from $115 a barrel in mid-2014 to $28 a barrel in January 2016.
Debasish Mishra, partner of Deloitte Touche Tohmatsu India, said with the government indicating a further cut on excise duty, retail prices may not rise beyond these levels. A further excise cut, however, will have an adverse impact on fiscal deficit target of 3.2 per cent of the GDP, which the government is committed to maintaining. This could pose an additional challenge in a year in which revenues from the Goods and Service tax and from non-tax sources are uncertain.
A further rise in crude oil prices is set to have an impact on inflation, as crude oil and its products have a weight of 10.4 per cent in the wholesale price index (WPI). “Of this, crude oil and natural gas have a weight of 2.4 per cent. Therefore, any increase in the price of crude oil would tend to impact the WPI inflation number commensurately. With the state duties/taxes being ad-valorem, the final impact would be higher than the change in crude prices,” the CARE Ratings report said.
Meanwhile, Ann-Louise Hittle, vice-president of analytical agency Wood Mackenzie, said, “With the extension, the supply and demand balance tightens in the second half of 2018 and helps lift prices in the second half of the year. We expect a pullback in first half of 2018 because of resumption of oversupply in the first two quarters.” This should be comforting news
for India just as the economy begins to stabilise.
A dollar increase in prices would increase India’s import bill by roughly Rs 10,000 crore on an annual basis
Crude oil and its products have a weight of 10.4 per cent in the wholesale price index
India imports 1,575 million barrels of crude annually
Source: Ministry of petroleum and natural gas