Crude crosses $50 a barrel; could scorch consumer expenses and put govt fin on slippery grounds

A crude reality is raising its head and could pour oil in the path of India's growth and make it slip on its economic targets in the current fiscal, even as it may scorch consumer expenses.

On Thursday, Brent crude oil price breached the psychological barrier of $50 per barrel, igniting fears of inflating the country's oil import bill, which constitutes a large part of the government's expense, and disturbing its finances.

An uptick in oil prices could also fuel overall inflation and push up prices of almost all goods and services.

Dr D K Srivastava, chief economic advisor, EY India, however, said as long as crude prices ranged between $35 and $55 a barrel, the government had little to worry about. The EY economist says it will put some pressure on government's revenues as it will have to settle for lower excise duty after hiking it last year to take advantage of the lower fuel cost.

He expects the burden of increased crude oil price to be shared between the government, consumers and the industry. "The burden will be shared between the government, consumers and the industry. Overall unit cost will go up because of this (rise in crude price). Our export competitiveness, which is already under pressure, might further reduce," said Dr Srivastava.

Last year, even when crude prices plunged, fuel prices did not dip in the same proportion as the government hiked excise duty. Experts are expecting that with prices inching upwards now, the government may snip excise duty to keep fuel prices stable and not let it rise to the same extent as crude prices. Last fiscal, India halved its import bill to $64 billion and is said to have saved around Rs 2 lakh crore, which helped it in meeting its fiscal deficit target of 3.9%.

The basket of crude oil imports of India averaged $105.5 per barrel in fiscal 2014, $84.2 a barrel in fiscal 2015 and $46.2 per barrel last fiscal.

Interestingly, the country is also witnessing a drop in domestic production of crude, which has forced it to import more oil to meet the local requirement.

Last month, India imported 15.6% more crude oil at 17.96 million tonnes compared with 15.53 million tonnes in the corresponding period last year. However, lower oil prices had offset its adverse impact on the government's fuel expenses. Now, with black gold prices scaling over $50 per barrel, the government may feel the pinch.

Arun Kumar Singhal, chief editor of Dew Journal, said he expected crude prices to remain range-bound and not shoot beyond $60-70 per barrel any time soon.

"The geopolitical factors in the Middle East, Russia and the US will keep the prices in check," he said.