Oil at $60 PDF Print E-mail
Thursday, 02 November 2017 06:20
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Lowers government room to manoeuvre considerably

The traditional view, that once oil crosses $50 a barrel, US shale comes into production—shale is supposed to be profitable at prices above $50—and so acts as a natural check on prices doesn’t seem to be holding. From $55 at the beginning of the year, prices fell to as low as $44 in June, but have been rising unchecked since and crossed $60 this week, a high last seen in July 2015. If the shale-as-balancing-force equation has broken down, at least partially, despite US shale production being up, it is because of the combination of the OPEC production-cut agreement—OPEC has agreed to cut production 1.8 million barrels per day—and the increase in global demand due to the world economy looking up. The impact of this is already visible in the balance sheets of corporate India, where raw material costs have once again started trending up due to an overall hardening of input prices. From 44% in the September 2015 quarter, raw materials to sales for a common sample of 1,410 companies fell to as low as 42.3% in the June 2016 quarter and then rose to 43.8% in the June 2017 quarter. The impact on government finances is even stronger.

An estimate by Nomura assesses the impact of a sustained $10 per barrel hike will be as much as 0.6-0.7 percentage points on CPI, it worsens the current account balance by as much as 0.4% of GDP and the central government’s fiscal balance by 0.1% of GDP. Indeed, the main reason why the central government was able to raise capex as sharply as it did was the oil bonanza. While oil prices halved between FY15 and FY16, the government hiked excise duties, as a result of which taxes from the sector rose from Rs 1.3 lakh crore to Rs 2.1 lakh crore and dividends from oil PSUs rose Rs 0.9 lakh crore—since total excise duty collections rose from Rs 1.9 lakh crore to Rs 2.9 lakh crore, this means nearly 81% of the hike was on account of petroleum duties/cesses.

Indeed, in FY16, higher petroleum duties ensured the budget target of Rs 2.3 lakh crore for excise was exceeded by a fourth. The same story continued in FY17, and of the Rs 1 lakh crore addition to excise duty collections, two-thirds came from the petroleum sector. Apart from the fact that this additional mop-up no longer looks possible now, the hike in global crude prices has already resulted in the government cutting excise duty rates to cushion the retail impact. With the oil bonanza gone, and no GST bonanza this year—indeed, there is a fear taxes may even fall short—a lot will depend on whether there is a spurt in income tax collections due to all the information collected on suspicious deposits after demonetisation.



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