Crude shock awaits central economic planning ahead of key state elections in 2022

Even as the center looks for ways to meet its budgetary targets without compromising its spending program, a danger looms on the horizon that can put the center in a difficult position. This danger is the unexpected rise in international crude oil prices.

Goldman Sachs raised its Brent crude oil price forecast to $ 90 a barrel, from $ 80 at the end of the year. The forecast has been revised due to the faster recovery in fuel demand in the global economy.

In the event that the price of crude oil reaches the level predicted by Goldman Sachs, the government will have to take a call if it wants to reduce the excise taxes levied on gasoline and diesel, or continue to earn a higher amount of revenues to meet its budget targets.

Until now, most international agencies expected crude oil prices to hover around $ 80 a barrel by the end of December 2021.

Brent futures hit a three-year high last week due to global disruptions. In the first six months of 2021, crude prices have already risen by more than 45%.

How a raw shock can shake the center

Due to lower than expected GST collections since its enactment in 2017, the NDA government has supported its spending programs by levying high excise taxes on petroleum products. When Covid brought the economy to a complete halt, expecting a real drop in income, the center further increased the excise duty on gasoline by Rs 19.98 (effective from July 6 2019) at Rs 22.98 from March 14, 2020.

It was further increased to Rs 32.98 per liter. While the opposition has criticized the center for imposing exorbitant fuel taxes, the government, so far, has shown courage, risking a political discourse against itself to support spending by aid regimes social such as MNREGA and food subsidies. Several state governments have used the same strategy to consolidate their revenues by maintaining high VAT rates on an ad valorem basis on fuel prices. But, historically, it is the central government that bears the responsibility whenever fuel prices exceed a certain threshold in India.

It was because of the high excise taxes charged by the center as well as several state governments that the price of gasoline and diesel crossed the 100 rupee mark for the first time in the country earlier this year. .

But now, if crude prices rise further in the international market, the decision not to lower excise duties may push the price of gasoline and diesel to unprecedented levels in the country.

The high prices of petroleum products directly contribute to the increase in CPI inflation. Transport and fuels represent 4.4% of the weight of the consumer price index. High oil prices are also contributing to inflationary pressure on several other sectors, including consumer goods, paints, fertilizers and automobiles, among others.

Between the devil and the deep sea

The reduction in the excise tax will, however, cause other problems for the center. If the government bites the bullet and opts for lower excise taxes on petroleum products, its revenues could suffer, compromising its ability to control the budget deficit.

The only way to come to terms with achieving low incomes would then be to compromise with his welfare regime just before the important state elections in the state of Uttar Pradesh and Punjab, among others.

Importantly, most of the international rating agencies downgraded India’s sovereign ratings due to the center’s inability to bring the budget deficit under control from 2017. Reports suggest the center will do representation. with the international rating company Moody’s to request a rating increase. In June 2020, the agency downgraded the long-term ratings of Indian foreign currency and local currency issuers to Baa3 from Baa2, which is the lowest rating for a sovereign.

In its rating review in 2020, the agency highlighted the weak implementation of economic reforms since 2017. Other reasons that led to the downgrade include low economic growth, high budget deficit and increasing stress. in the country’s financial sector.

The centre’s budget deficit in 2020-2021 was 9.3% of GDP, as revenues from the GST and other sources dried up. If it had not been Rs 2.34 lakh collected through excise duties on petroleum products, the figures would have been much worse for the government.

The importance of the high excise duties on petroleum is evident from the following figures: The average share of central excise duties on petroleum products was 12% in the collection of gross receipts for the period 2017-18 to 2020- 21. The share of central government excise duties on petroleum products for 2018-2019, 2019-2020 and 2020-21 were respectively 2.35 trillion rupees, 1.97 trillion rupees and 344 trillion rupees, and 3.4 trillion rupees, respectively. rupees.

India imports over 80% of its crude oil needs, making it one of the major economies most vulnerable to fluctuations in crude prices.

According to RBI, a $ 10 a barrel increase in crude prices causes an additional deficit of $ 12.5 billion, contributing to 43 basis points of India’s current account deficit in the economy.

Given the current scenario, any rise in the price of crude oil will give the center nightmares. The only respite in this scenario may come from higher than expected GST collections over the next few quarters or other factors in international markets that do not allow crude oil prices to rise by $ 10 / bbl over the years. next three months.

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