With growth at 7.6% in the Financial Year (FY) 2015-16, India retained its position as the world’s fastest growing economy. It did well in curtailing twin deficits (fiscal and current account) in the last financial year. This wouldn’t have been possible had crude oil prices stayed high. India meets 80% of its oil demand through imports. This makes the Indian economy vastly dependent on crude oil prices as they affect the national budgets and policies.

Oil import-dependent developing countries, such as India, can’t have a system of passing on these price rises to the consumers. It endangers the general price stability. On the side of the scale, petroleum products can’t be made heavily subsidized as it puts a severe strain on public finances. The Government faces a bigger dilemma when limited revenue restricts its ability to spend on the developmental agenda. This is precisely what the Indian Government faces today. To grow at brisker pace, it is important for the country to invest hugely in infrastructure development, reduce subsidy bill, and increase state revenues. To shore up Government funds, NDA Government increased the duties on petroleum prices when the crude oil prices were falling relentlessly in FY 2014-15 and FY 2015-16.
 

Will the windfall of lower crude oil prices end in FY 2016-17?

(Source: The Ministry of Petroleum and Natural Gas, PersonalFN Research)  

There’s been a huge uproar against the Government not passing on the benefits to the consumers. Justifying the move, NDA Government claimed that the national savings on account of falling crude oil prices were to be utilised for the incremental investments in infrastructure. The Government has allocated Rs 2.21 lakh crores for the development of infrastructure in the Budget 2016-17. Moreover, it also endeavours to restrict India’s fiscal deficit to 3.5% in FY 2016-17 as against 3.9% achieved in FY 2015-16. In other words, the Government is expecting to manage its finances fastidiously.

But as you know, any budget is based on a set of assumptions. In India’s national budget, predictions and analysis revolving around crude oil prices holds an immense importance. To achieve the targets of Budget 2016-17, the Government is hoping that the India crude oil basket will remain in the range of US$ 45 to US$ 55 per barrel.. In April 2016-17, the average price of Indian basket stayed a tad below US$ 40/bbl. However, since the beginning of this fiscal, global crude oil prices have seen an uptrend.
 

Will crude oil prices advance in FY 2015-16?

(Source: EIA, PersonalFN Research)

As the graph reveals, the sudden jump of 34% has rung the alarm bells for India. If crude oil continues its journey in the northwards direction, it has the potential to derail India’s budget. If it happens indeed, the Government will be up to their elbows in balancing the revenues and subsidies. In such a case to maintain the price stability, it may also have to think about slashing the duties and other taxes it imposed on the petroleum products when crude oil prices were on the downward spiral. Any reduction in duties would mean lower revenue collection in the Government’s coffers. As the oil ministry data suggests, the Central Government collected Rs 1.34 lakh crores in the first nine months of FY 2015-16 by way of taxes and duties on crude oil and petroleum products. Moreover, state Governments garnered Rs 1.17 lakh crores through duties and taxes on petroleum products.

Rising crude oil prices are not bad always
In general, rising crude oil is a negative for India. However, trust PersonalFN to uncover the two positives:

1. India receives higher remittances from NRIs living in countries exporting crude oil (largely Gulf countries along with few African countries.)
2. Indian companies exporting petroleum products report higher realisations when crude oil prices move up.

 

Since crude oil prices also affect RBI’s monetary policy decisions, their impact is much greater on Indian economy. Now it remains to be seen what direction crude oil prices move in. Logically, if the Government increased the duties on petroleum products to encash gains of lower oil prices, it should now cut duties and taxes to safeguard people of this country against inflationary pressures. Striking the balance would be substantial.

What to expect?
Organization of Petroleum Exporting Countries (OPEC) has repeatedly failed in reaching a consensus on the cutting down or freezing the oil production. On this backdrop, reading too much into the sharp swing in the crude oil prices would be nothing more than a speculation.

PersonalFN has always informed its readers and investors about the possible downside of speculation. Rather than focusing on such macro events, it would pay off if you concentrate on your financial goals and try achieving them through a neatly crafted asset allocation plan.
 

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