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Monday, 15 December 2014 00:40
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Shobhana's edit

Important for India to seize the LPG moment

The sharp drop in the price of crude oil to $65 a barrel, from about $100 even three months ago, is a big relief not just from the point of view of what it does for the current account deficit (CAD)—given that oil comprises 30% of imports, a $1 fall means a CAD saving of $900 million—but also in terms of what it means for inflation control. While falling global commodity prices—at an 11-year low if you exclude the 2008 crisis—have dampened food inflation, the fall in crude and commodity prices, Credit Suisse estimates, could affect 30-60% of the input costs of major consumer companies. Though RBI expects interest rates to inch up after December, even it acknowledges an overall lowering of inflation—two months ago, RBI’s central tendency was an inflation of around 7.75% in March 2015; today, that central tendency is at 6%.

There is, of course, a flip side to the crude oil crash. For one, tax collections on petroleum items have fallen, prompting the government to raise excise duty rates on both petrol and diesel. Neelkanth Mishra of Credit Suisse argues that oil-producing nations will be worse off and the sovereign wealth funds (SWF) of these countries—which have been pumping in surpluses into emerging markets—will no longer be in a position to do so as before. Mishra believes foreign flows into equity markets may halve in 2015 from levels of around $18 billion this year. This, however, could be muted by the fact that, with global inflation at a decadal low—excluding the 2008 crisis—central bankers will be encouraged to remain accommodative. In any case, the ECB and the Japanese central bank authorities appear committed to keeping monetary policy easy and a couple more may follow which means there is likely to be ample liquidity—Kotak Institutional Equities estimates a $1.7 trillion increase in the size of the G-4 central bank balance sheets by the end of 2016. Also, chances are, with low global inflation, the Federal Reserve will put off raising rates for longer which means there is less likelihood of foreign funds moving out of India’s bond and stock markets due to the interest rate differentials.

In such a situation, it would be a pity if the government did not seize the opportunity to take some tough decisions. Decontrolling diesel prices required no effort since the Congress had done all the heavy lifting by small but regular hikes in prices. What the NDA needs to do is to announce a schedule for cutting LPG subsidies gradually—LPG subsidies are currently R52,246 crore. To the extent global LPG price falls further, the subsidy cuts will be neutralised by the fall in prices and, as in the case of diesel, LPG can be freed up after a couple of years—or, as was promised in the original dismantling of the administered price mechanism when the NDA was last in power, a subsidy proportion can be fixed with the rest fluctuating according to market prices. As in the case of diesel, freeing up of prices will also encourage more private sector firms to come into the marketing space.

 

 

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