Oil Prices Are Rising Again: What Will Modi Govt Do? - Vivek Kaul's Diary
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Oil Prices Are Rising Again: What Will Modi Govt Do?

May 18, 2016

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In a little over a week, the Narendra Modi government will complete two years in office. The finance minister Arun Jaitley, has already started to give interviews in the media, highlighting the success of the Modi government on the economic front. The Vice Chairman of the NITI Aayog, Arvind Panagariya, has written columns around the same, as well.

What both of them haven't really talked about is the oil price and its dramatic fall, during the time the Modi government has governed India. On May 26, 2014, the day Modi was sworn in as the prime minister, the price of Indian basket of crude oil was $ 108.05 per barrel. Nearly two years later, as on May 16, 2016, the price of the Indian basket of crude oil stood at $46.18 per barrel.

Interestingly, it even touched a low of $26.95 per barrel on February 12, earlier this year. This was a massive fall of 75%. The point being if this hadn't happened, the finances of the Modi government would have gone for a toss totally. The petroleum subsidy number fell from Rs 92,000 crore in 2013-2014, to a little over Rs 60,000 crore in 2014-2015, to around Rs 30,000 crore in 2015-2016. For 2016-2017, around Rs 27,000 crore has been budgeted for the petroleum subsidy.

The government benefitted on two counts. First, it got a lower petroleum subsidy bill. Second, it captured a large part of this fall in oil price by increasing the excise duty on petrol and diesel. Between November 2014 and now, the excise duty on oil and petrol, has been increased nine times.

The total excise duty collected by the government on petrol and diesel in 2014-2015, had stood at around Rs 1,56,000 crore. This jumped by 59% to a little over Rs 2,48,200 crore in 2015-2016. Hence, lower oil prices were of huge benefit to the government. The state governments also cashed in by increasing the value added tax on petrol and diesel.

By doing this, the fall in the price of oil wasn't passed on to the end consumers. The trouble is that now oil prices have started to go up again. Between February and mid-May, the price of the Indian basket for crude oil has gone up by more than 71%. As on May 16, 2016, it quoted at $46.18 per barrel.

In a scenario of falling oil prices, the government did not pass on the entire fall in oil prices to the end consumer. Hence, in a scenario of rising oil prices it shouldn't pass on the entire increase to the end consumer as well by cutting down the excise duty on petrol and diesel. That will be a fair thing to do.

In an ideal world, the Modi government should have freed up the price of petrol and diesel totally, and let the international price of oil, decide the market price of petrol and diesel. If they had done that people would have adjusted to the idea of high oil prices, given that they would have seen low oil prices as well.

But that hasn't turned out to be the case. The price of oil now is 57.3% lower than it was in May 2014. But the price of petrol and diesel has fallen by 17.4% and 12.9% only, in Mumbai.

Also, it is important to remember here that high oil prices can end up screwing the accounts of the government. This is simply because the government still subsidises the sale of cooking gas as well as kerosene oil.

Further, what does the government plan to do if oil prices continue to go up? If the government continues to raise petrol and diesel prices, I am sure there is going to be a public outcry.

This will happen simply because last time around when oil prices really went up, the end consumer did not have to pay for higher petrol and diesel prices. The oil marketing companies, the oil producing companies and the Manmohan Singh government bore the brunt of high oil prices. The consumer did not. This ended up screwing up the finances of the government.

Also, this time around the Modi government has benefitted tremendously from lower oil prices by raising excise duty on petrol and diesel. It had a tremendous opportunity to move towards a market driven price of petrol and diesel. But if it did that, it would have had to look for alternative sources of revenue.

It would no longer be possible for it to continue financing loss making public sector enterprises. This would mean that some ministers would have become totally jobless. It would have had to sell more shares in profitable public sector enterprises and so on. It would also have to look at ways for cutting down on frivolous expenditure that almost all governments indulge in. It would also have to sell its shares in the cigarette maker ITC, which it strangely continues to hang on to.

Of course, all these would have been difficult decisions and the government chose to latch on to the low hanging fruit of raising excise duty on petrol and diesel. A huge opportunity was missed out on.



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Further, what is the government's view on higher oil prices? As finance minister Arun Jaitley said in an interview to The Economic Times recently: "You see as far as the oil prices are concerned, this is one area where nobody has been able to predict, even reasonably what is going to happen. It is only after the event that people analyse what has happened. When the prices were close to a $120, nobody really thought that they will come down below 30. At 30, they said it would stabilise at 40, now it is 50."

What Jaitley said was that oil prices cannot be predicted. This is a view that I have often maintained in the past. Nevertheless, after saying this, Jaitley went on to do exactly the opposite i.e. he tried to predict oil prices. As he said: "I think they are still range bound. And being range bound they are within the limits of what India can consider to be affordable and therefore unless there is some very alarming increase, which does not look likely at the moment, I think we are reasonably comfortable."

So Jaitley feels that there are no chances of any alarming increase in oil prices. He said this after explaining in detail that no one can predict oil prices. This prediction came after oil prices have risen by 71% in a little over three months.

As Philip Tetlock and Dan Gardner write in Superforecasting-The Art and Science of Prediction: "Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge-from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley-and the number of factors that can influence those factors is even bigger."

While, the government and those who run the government may not be able to predict oil prices, it is important that they think through what they plan to do if oil prices do continue to go up. This becomes especially important given that they did not pass on the fall in oil prices to the end consumer. Also, they are well and truly addicted to all the easy money coming in from raising the excise duty on petrol and diesel.

What is the Plan B of the Modi government? And more specifically, do they have one?

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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8 Responses to "Oil Prices Are Rising Again: What Will Modi Govt Do?"

Ashish Kaul

May 24, 2016

Guess what would happen to inflation with each weeks increase in oil prices in india...somewhere the Interest rates which are predicted to go down would be propotionately strengthened.

Like 

K Balasubramanian

May 19, 2016

It is really worrying what the govts, state and centre do when oil prices go up. The erratic and fanciful rises and drops of price fortnightly have brought a havoc on public. The transport sector including railways has screwed the public never reducing fares during power prices resulting in spiralling cost of living. Lower oil prices should result in lower cost to ultimate users.

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D K Purwar

May 18, 2016

Mr.Vivek,I think this is another stupid articles from your end.
what type of economist & analyst you are?You are asking them about B plan.They are running government will come out with the solution.I will be happy to know if would have told your B plan in such situation.
Jaitely has not predicted oil price but said 50- 60$ is OK.you talked about softening oil prices but forgotten advarse affect of 2 yrs drought & slowdown in global economy.
You analyst always for diluting/ selling air India/axis bank/L&T/BEL/HAl etc.you criticise Banks for NPA.Who has to be blamed.Only private sector.why do not you suggest these private promoters to sell their business.There are handful of industrialists in India including FMCGC which created wealth for all stakeholders. others companies simply in business to investors by manipulating share price in stock exchanges with the help of brokers,analyst,portfolio managers & looting investors.

Like (1)

Anoop

May 18, 2016

Very well articulated Vivek. For a reader, the facts are quite frustrating, though educating. The point is: what do you do with this information? Being more aware about something that one just can't control, does not help, except if one can dis-associate from that aspect of the eco-system. Forget Modi, has there been any government that had a plan?

Like (1)

sanjay parijat kaul

May 18, 2016

Is the trilogy available in the market?

Like (1)

LOGAN

May 18, 2016

Experience says, Government will do nothing about it.

They will collect more taxes.

Like (1)

Balakrishnan R

May 18, 2016

Dear Mr. Vivek,
Mr. Jaitly might have done one more simple thing during falling petroleum prices. i.e., he could have slowly reduced the subsidy on cooking gas and Kerosene oil while the crude oil prices have been falling. He didn't do, because he was getting a lot of money through increase in excise duty on Petrol and Diesel. This might have helped in curtailing the abnormal increase in consumption of petrol and Diesel.

Like (1)

Nidige Kumar

May 18, 2016

When Oil Price was US$ 100/bbl, the prediction was that it will reach US$200/bbl but it never happened. Also when the price went down to US$20/bbl, the prediction was that it will reach US$10/bbl which never happned. Therefore, it is fair to assume a range of figures keeping in mind there is a paradigm shift in supply situation due to Iran, Iraq, the newcomer US shale oil and serious committment to reduction of carbon emission coming into picture. Oil reaching again to US$100/bbl will remain a dream forever. Though it is madness to predict oil price, getting prepared for uncertainties is good. However, oil price is likely to remain range bound with upper limit as US$65/bbl for a long time to come.

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