At $50 per barrel crude prices, India can have a current account surplus of 1% in FY16. Which means that there may not be any need for the massive oil subsidies next year.
What is common between Mexico, Ghana, and Morocco?
They all hedge oil to protect their revenues and keep their fiscal spending in check. India, too, should seriously consider this option given its dependence on oil and its need to reign in fiscal deficit.
The rise and fall in oil prices are tantamount to every fiscal debate in India. Given the massive drop in oil prices over the past year, India no doubt is gaining. However, it is time the Indian government looked at its fiscal jurisprudence and hedge its oil exposure.
Another option is to build reserves which can help India to buy oil and store it. Construction of a three reserves totalling 37 million barrel capacities is already underway but they take time. The US and China have reserve storage capacities of 690 million barrel and 100 million barrel, respectively.
Is it time to hedge oil?
For an economy which is so dependent on the oil prices, shouldn't it make fiscal sense to take full advantage of this crude oil price crash? Analysts say that even if India is able to lock current prices for oil for at least a year, it will give a massive opportunity to put the fiscal house in order.
The accompanying chart shows that it is possible for India to actually post a 1% surplus in its current account in FY16.
Current account deficit as a percentage of GDP
The current drop in oil prices is a $50 billion gift for India, or, 2.3% of its GDP. According to Gautam Chhaochharia, Edward Teather and Sanjeev Dadawale of UBS Global Research, in a report dated January 14, 2015 said, "At $50 per barrel crude prices, India can have a current account surplus of 1% in FY16. In other words, there may not be any effective need for net subsidies for oil (0.8% of GDP in FY14)."
An analyst said, "The Modi-government is talking big on reforms and if they indeed lock oil prices, the amount of money they will free up to use for other reforms will simply be spectacular."
Although, the Reserve Bank of India (RBI) has advised the Government of India to hedge oil, the government hasn't yet taken any decision on the matter.
The UBS trio wrote that locking in current oil prices may be an attractive option for the Government. The local oil economy (subsidies, Govt fixing retail prices etc) has anyway not been economics. We think the Govt should consider this option."
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