Crude shock: CAD ghost to haunt India again in FY19 as oil prices soar

Landed price of oil as 20% higher than govt assumption this week

The last year of the current National Democratic Alliance government (2018-19) could be very similar to its first year (2014-15) in terms of its ability to manage India’s current account and to earn substantial revenue from retail sale of petroleum products, if current oil prices are taken as representative for the year.

Crude oil price for Indian basket touched $75 per barrel on May 9 after 41 months — last such instance was in the first week of December 2014 — as Brent crude prices rose 6 per cent in the first 10 days of the month from $73 to $77.7 per barrel. Adding to this the depreciation in Indian rupee, the landed price of a barrel of oil was Rs 5,050 per barrel on May 9.

Thus, input cost of oil for refineries has jumped 40 per cent, compared to six months ago, while it is about 20 per cent more than the assumption made in the Budget. In October 2017, oil was fetched at Rs 3,636 per barrel, while the government has assumed Rs 4,225 per barrel for the year.

The government has made two assumptions: Oil (Indian basket) would average $65 per barrel, and rupee would average at Rs 65 a dollar over the year. On this basis, it has estimated the crude oil import bill to be $105 billion in 2018-19, 20 per cent higher than that in 2017-18.

With rupee trading at Rs 67.4 per dollar (May 9), both the assumptions have been breached by a considerable degree in May, which does not augur well for the government’s budgeted plan, and the actual import bill could possibly go above expected $105 billion. Value of crude oil import was $113 billion in 2013-14.

In addition to contribute heavily to the widening current account deficit, this price rally in the last year of the current government would wipe off the windfall gain made in the three middle years.

Oil marketing companies and sources from the government, however, are keeping a wait-and-watch stance. M K Surana, chairman and managing director of Hindustan Petroleum Corporation has termed this rally as a temporary phenomenon.

“There is no fundamental reason for the current price rise in the international market. The short-term spike due to Iran sanctions has not been supported by the European Union or the United Nations,” Surana told Business Standard.

When oil prices were in the $50-$60 range, current account deficit (CAD) for the first three quarters of 2017-18 stands at 1.9 per cent of gross domestic product. This is worse than 1.7 per cent in the last year of the United Progressive Alliance government. Rising oil prices would put further pressure on CAD in 2018-19.

On the other hand, rise in cost of imported oil has a direct impact on retail prices that Indian consumers pay at diesel and petrol stations. Since the last reduction in union excise duties on retail sale of petrol and diesel in October 2017, diesel prices have risen by 12 per cent, while petrol prices by 6 per cent.

In the current oil rally (Indian basket) from $70 to $75 per barrel in the last fortnight, there has not been any rise in retail prices, though industry observers feel that it is imminent, which can potentially prompt the government to sacrifice a splice of revenue in the form of Union excise duties.

“For every rupee cut in excise duty, the government loses about Rs 130 billion, and for any such cut, the impact will be huge. Iran sanctions would not have any major impact on our imports, but if prices go up because of that, it would be a cause for concern,” said a senior government official.

The government currently levies Rs 19.48 per litre of petrol consumption, while Rs 15.33 per litre of diesel consumption as excise duties and road cesses from consumers.