Delhi:The government may not be able to continue passing on the rise in global crude prices to consumers for long without pushing up the consumer price index (CPI) inflation, say economists.
The government has till now resisted from cutting excise duty to reduce the impact of global crude prices on domestic petrol and diesel prices. On Monday, petrol price touched a three-year high at Rs 74.50 per litre and diesel was at its highest level at Rs 65.75 per litre.Till now, the current macroeconomic scenario playing out can be seen as Goldilocks situation, where fiscal discipline is maintained with soft inflation rate. March CPI inflation number came in at five-month low of 4.28% compared with 4.44% in the month before.
The economic survey this year had said the contribution of fuel and light in CPI inflation, during the April-December 2017 period, was thrice of that during the same period in 2016.
“Going by the recent trends, the average crude oil prices could be in the vicinity of $56-57 per barrel in the current financial year (FY17) and could rise further in 2018-2019,” the survey had cautioned.
The survey’s outlook on oil prices is not way off-the-mark with Brent touching $75 per barrel on Tuesday only to dip below $74 per barrel on Wednesday.
According to Nayar, since petrol and diesel were not a very large part of the CPI basket its impact is not felt immediately; “Crude oil does not enter the CPI basket, so there is limited first-round impact of higher global crude oil prices on CPI inflation”.
The economic survey estimates that for every $10 per barrel rise in crude, 0.2%-0.3% of the GDP growth is shaved off while the current account deficit (CAD) expands by 0.4 percentage points of the GDP and inflation climbs up 0.2%-0.3%.
D K Srivastava, chief policy advisor, EY India, said while fuel prices were reflected in the CPI inflation, it had limited impact because a lot of its components were taken into account.
The EY economist said in the long run rising crude prices will become a matter of concern for the Indian economy, as it will considerably inflate the import bill and impact either fiscal deficit or inflation.
According to him, the central government could intervene and adjust the excise duty as most of the state governments have ad valorem taxes on petroleum products, which means that when base prices go up then overall prices also go up.
“The central government levies excise duty on petroleum products. That is why it has to keep adjusting it. It can lower the levy or increase it to align it to the trend in crude prices,” he said.
The government has estimated that its crude oil import bill will rise by 20% to $105 billion in the current fiscal from $88 billion last year. It has assumed an average crude price of $65 per barrel, which is about $9 lower than the current market price.
This projection of 20% increase comes on the back of an already 25% rise in crude oil import bill in FY18.
Icra’s Nayar has a slightly different estimate. She is expecting the net crude oil import bill to surge by 25.7% to $88 billion in FY19 from $70 billion last fiscal.
“We look at the net oil import bill. We take the total petroleum oil and lubricant (POL) import and we subtract the POL exports,” she said. The Icra economist was working on an average crude price of $67 per barrel for the full year. She said that if it breaches this level, it would put pressure on CAD.
“If we take the crude oil on an average at $67 then our CAD is coming at 2.2% of GDP and if we take it at $70 then it would be 2.4% of the GDP. A CAD of 2.5% of the GDP, by itself, is not an alarming figure, but we have to see what would be the level capital inflow. In any case, our forex reserves are also very high right now. So, that mitigates the concern. Therefore, as of now, this is something we need to watch carefully, but not be alarmed about,” said Nayar.
According to EY’s Srivastava, crude prices above $60 per barrel was a matter of concern for the government. He does not see crude going beyond $70 per barrel. “It is likely to remain between $65 per barrel and $70 per barrel,” said Srivastava.
Interestingly, as per data published by Petroleum Planning and Analysis Cell (PPAC), production of indigenous crude oil and condensate was down 1.6% last month compared with the same month last year.
“While PSC (production sharing contract) fields registered a growth of 1.7% during the month over March 2017, PSU (public sector undertaking) companies registered de-growth of 2.9%. On a cumulative basis, there was a decrease of 0.9% over the previous year 2016-17 in indigenous crude oil and condensate production,” states the PPAC.
Such a dip in production could further swell the crude import bill and squash any hope of consumers of a drop in local petrol and diesel prices. One now has to wait and see how long before inflation fires up due to scorching petrol and diesel prices and forces the government hand to snip excise duty.