Budget 2018-19: Crude oil on fire may burn a hole in govt coffers

With crude prices on the boil and general elections just around a year away in 2019, the pressure is mounting on the government to reduce the excise duty on auto fuels in order to lower the burden on consumers and to keep a lid on inflation.

Moreover, with the rise in crude prices in global markets, gross under-recoveries will escalate for the public sector oil marketing companies, claim experts.

As per an estimate by oil ministry, the country's crude oil import bill may swell 15% to $81 billion in the current fiscal year amid the output cuts led by Organization of the Petroleum Exporting Countries and Russia, which has pushed the crude prices upwards. Further, though the volume of crude import is likely to see little change from 213.5 million metric tonne in 2017-18, the value may rise by $11 billion. In rupee terms, the value is estimated to go up to Rs 5.2 lakh crore from Rs 4.7 lakh crore.

According to a report prepared by rating firm Icra, under the existing subsidy sharing policy, the government is committed to meet subsidy up to a level of Rs 12 per litre of kerosene through the public distribution system (PDS) and Rs 255 per cylinder of LPG.

While the current framework caps the subsidy to be borne by the government, it will nonetheless call for additional subsidy allocation for 2018-19 as compared to 2017-18 as the latter was done assuming a crude price of $55 per barrel. If Indian basket crude price were at $70 a barrel, India's subsidy requirement will rise to around Rs 34,300 crore in 2018-19 as per Icra estimates, as compared to Rs 22,400 crore in 2017-18.

“Hence additional allocation of subsidy will be keenly watched by the industry participants,” said K Ravichandran, group head, corporate ratings, Icra.

The report adds that apart from the subsidy, relaxations in several taxation issues such as broadening the definition of 'mineral oils' for tax holiday of exploration and production (E&P) players, extension of sunset clause for E&P blocks under Sec 80 IB (9) and reduction in Customs duty on liquefied natural gas are awaited by the industry.

“Moreover, clarity is awaited on the applicability of service tax on royalty and profit petroleum payments for E&P companies,” Ravichandran added.

A report prepared by another rating firm CARE said that crude oil price will put pressure on inflation, the balance of payments and fiscal policy. Also, rise in crude oil will increase the price of natural gas, which, in turn, will increase the input cost for fertiliser and petrochemical companies which use fertilisers as a feedstock and increase the price of city gas distribution entities and power companies which use natural gas as a fuel.

India is world's third-largest consumer of crude oil and imports around 4.2 million barrel per day. At the macro-level, with imports of 1,568 million barrels of crude oil on an annualised basis, a dollar increase in prices on a permanent basis would increase the bill by roughly Rs 10,000 crore on an annual basis assuming no change in exchange rate. Further, import bill would increase by approximately $ 1.5 billion for every dollar increase in crude oil price.

“Challenge for the government would be on the fiscal side and the assumption made for the year. In the face of higher inflation, the options would be to either increase subsidy on the expenditure side or lower taxes (along with states) on revenue side,” said Urvisha Jagasheth, research analyst at CARE Ratings, in the report.

The government is working on a policy to bring down the annual oil import bill by $100 billion by 2030 through extensive use of methanol in cooking gas and transportation fuel, Union minister Nitin Gadkari told Lok Sabha recently. As per the plan, 15% methanol will be blended with petrol, which will reduce the cost of the fuel by 10%.

THE STORY SO FAR

• Crude oil crossed the $70/bbl mark, the highest since December 2014. Brent was $32.1/bbl in January 2016 and $64.1/bbl in December 2017
   
• In October 2017, prices started to rise on export cuts by Saudi Arabia and production cuts undertaken by Opec