Oil@35: The govt has captured most of the oil price fall

Dec 15, 2015

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In the column published on December 10, I had discussed why the oil price has been falling and is now below $40 per barrel. Data from the Petroleum Planning and Analysis Cell (PPAC) shows that the price of the Indian basket of crude oil as on December 11, 2015, was at US$ 35.72 per barrel. In the last one month the price of oil has fallen by around 16%.

In the column published on December 10, I discussed the reasons behind the falling oil price and why the trend is likely to continue at least in the short run. In today's column I will discuss how falling oil prices will impact India.

The biggest beneficiary of lower oil prices is the government. The oil marketing companies sell certain oil products like kerosene and domestic cooking gas at below the cost price. The government subsidises them for this. In the budget for this financial year, the government had assumed a total subsidy of Rs 30,000 crore. This included Rs 22,000 crore subsidy for domestic cooking gas and Rs 8,000 crore kerosene subsidy. There are no under-recoveries on petrol and diesel anymore.

Oil prices have fallen by close to 35% since the beginning of this financial year. Given this, chances are that the Rs 30,000 crore allocation towards oil subsidy should work just fine. In the past, the government used to share the total under-recoveries occurred by oil marketing companies at various points of time during the course of the year.

From what I could gather looking at government press releases, this practice seems to have been stopped since the beginning of this financial year. If the total under-recovery number on the sale of kerosene and cooking gas was available, I could have said with greater confidence that the Rs 30,000 crore put aside for oil subsidies would be enough. (The point again shows how difficult it is in India to do write stuff based on data).

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Hence, with oil prices falling, the total expenditure of the government should remain under control. In the past, with rising oil prices, the government ended up under-budgeting for under-recoveries. This led to higher expenditure, a higher fiscal deficit and higher borrowing to finance the fiscal deficit. This is unlikely to happen this time around. Fiscal deficit is the difference between what a government earns and what it spends. A higher fiscal deficit pushes up interest rates as the government borrows more and this is not good for the economy.

Further, the government hasn't passed on the benefit of falling oil prices to the end consumers. The price of petrol in Mumbai as on April 2,2015, was Rs 67.53 per litre. Currently petrol sells at an almost similar price of Rs 67.55 per litre.

During the same period the price of the Indian basket of crude oil has fallen by close to 35%. The price as on April 2, 2015, was $54.77 per barrel. By December 11, 2015, the price had fallen to $35.72 per barrel. The same is true for diesel as well. The price of diesel in Mumbai as on April 2, 2015, was Rs 55.69 per litre. Currently, it retails at Rs 53.09 per litre or around 4.7% lower. The government has captured much of this gain by increasing the excise duty on petrol and diesel. Excise duty collections between April and November 2015 are up by a whopping 67% to Rs 1,70,693 crore. Much of this jump has come from an increase in excise duty on diesel and petrol.

In fact, a series of tweets by revenue secretary Dr Hasmukh Adhia gives more clarity on this front. Adhia said that the total indirect taxes between April and November grew by 34.3% to Rs 4,38,291 crore. Customs duty, service tax and excise duty, together make up for indirect taxes. The increase has primarily come from "the excise increases on diesel and petrol, the increase in clean energy cess, the withdrawal of exemptions for motor vehicles, capital goods and consumer durables, and from June 2015, the increase in Service Tax rates from 12.36% to 14%." If these increases are discounted for then the increase in indirect taxes was at 10.3%, Adhia tweeted.

Getting back to oil. Earlier this year the investment bank Goldman Sachs said that there is less than 50% chance that oil prices will drop to as low $20 per barrel. If that were to happen, it would be great if the government passed on the gain to the end consumers as well, instead of trying to capture all the gain for itself.

My guess is that the government will try and capture the gains from any further fall in the price of oil as well. This 'easy money' will allow the government to go easy on other fronts. This will mean that the government will continue to subsidise loss making companies like MTNL and Air India. No hard decisions will be made on this front. Further, the disinvestment of public sector companies will take a backseat, as it already has, on the pretext of the stock market not doing well.

Theoretically falling oil prices should also push down the fuel bill of companies. But as the recently released data on the performance of non-financial private corporate business sector during the second quarter of 2015-16 (July- September 2015) by the Reserve Bank of India shows, that is clearly not happening. The power and fuel costs of Indian companies (a sample of 2,711 companies) went down by just 4.2%, despite the price of oil falling much more. The reason for this lies in the fact that the government hasn't passed on this fall in price to the end consumer.

India imports close to 80% of the oil that it consumes. Given this, any fall in price of oil is beneficial to the country. Any fall in oil prices means that we will be paying fewer dollars for the oil that we import. And this means that our oil import bill will come down. That's the good bit. On the flip side, India is also a big exporter of oil products (we refine oil and export oil products). In October 2014, oil products were India's biggest export at $5.73 billion. Since then with a fall in the price of oil, oil products have become India's third largest export at $2.46 billion in October 2015. Hence, while falling crude prices are beneficial on the import front, they hurt on the export front as well.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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7 Responses to "Oil@35: The govt has captured most of the oil price fall"

Manoj

Dec 15, 2015

This is very good chance of govt to remove of all type of subsidy & kill the subsidy devil & lot of unnecessary schemes like direct benefits , all public distribution system, monopoly of govt company on LPG distribution, By removing the subsidy all petroleum sector become more efficient. In India only we get 10 Rs mineral water in bottle near your house or in plastic pack but 70 Rs petrol you have to move many kilometer to fill in your vehicle & still you are not sure about quality.

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Balakrishnan R

Dec 15, 2015

One way it is good that Government is taking the benefit of decrease in oil prices by means of increasing excise duty. This will avoid excessive consumption of fuel, especially diesel. The government should not have any hesitation in reducing excise duties while the oil price goes up. This leads to indirectly monitoring petrol and diesel prices. The fall in export of oil products may be due to increase in excise duties.

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virendra singh verma

Dec 15, 2015

About six months back, when people started crying, why the Govt. is not passing the benefits of low crude prices to the consumers, Govt. gave the explanation that Oil Marketing companies are incurring losses for a long. Hence they could not make any expenditure to increase their refining infrastructure,so this money will be used to expand capacity. Now, I believe Govt. again thinking for increasing excise duty on petrol and Diesel.

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Bala V

Dec 15, 2015

Falling crude price shd not hurt exports...the refineries profit from value addition, which as a percent of cost, shd be similar to what it was before. The absolute value may go down marginally.

For a govt that claims to be active, with a parliamentary majority (which the earlier puppet coalition govt did not have & used to justify their inaction), this govt shld bite the bullet and throw the new found income (which wouldn't last once public wakes up to the price at pump vs import bill fall) into developing the infrastructure... That would earn back more than your investment... Throwing money into loss making psu will only burn the money for nothing.

Give back air India to Tata's, sell mtnl to local operators...give them a free hand to deal with the staff, use these funds to support early retirement, vrs & others...will get us back to stopping the hemorrhage and on path to genuine growth. It would benefit both govt and public.

Will good sense prevail...will opposition allow such progress -like the holding to ransom thats going on, on the gst? India was not blessed with forward thinking PM for all these years since independence, except for now...most were either the unable to act or unwilling to act only promoting corruption...will it be different now? History on India rising could be written anew and with vigour...if the right hand is played. I hope and pray, it will happen...for we have been taken for a ride for too long with the carrot at end of stock...time to get our teeth into it now.

Govt...are you listening??

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Jayabrato Deb

Dec 15, 2015

I think the author missed out one aspect while highlighting Governments action on increasing excise duty on petrol and diesel to absorb oil price drop. Even mentioned that petrol and diesel prices remained more or less same though crude price decreased by 35%
I think, the author should have given a balanced view by mentioning that Government is also loosing customs duty part which is advelorm and looses revenue when revenue drops due to drop in crude oil price. Further India also imports close 10-15 million tons of chemicals and petrochemicals whose price directly depends on crude price and there is also loss in customs duty revenue.
It wil enlightening for all of the author can commission a study on overall revenue impact due to drop in oil prices.

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Girish Patkar

Dec 15, 2015

If only it was as easy as we wish to privatise Air India , MTNL, etc. the Government would not have waited so long. The parliament is held to ransom on flimsy grounds , and negative propaganda by the Congress that the Government cannot open another front ( divestment of Air India and MTNL).

Ultimately, we are a democracy and governments have to get elected every five years.

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Shankar S

Dec 15, 2015

Is the government in doing business for profits?
Are there no social responsibilities ?
will closing down any and all loss making units of the govt be good for the country as a whole?

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