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Ahead of the Union Budget, the government's finances are looking up thanks to the benefit flowing from the major slump in crude oil prices in the past eight months. The government's petroleum subsidy burden, that accounts for 35% of the Rs 245,000 crore of major subsidies annually, is seen declining by Rs 30,000 crore in the current financial year from Rs 85,000 crore recorded last fiscal.
Experts expect the fuel subsidy outgo will further come down by Rs 25,000 crore in 2015-16. In addition, the government is set to gain an additional Rs 15,500 crore in the current fiscal and Rs 50,000 crore next fiscal from the four recent excise duty hikes.
"Our estimate is the fiscal space created by lower fuel subsidy and higher excise collections in financial year 2014-15 as compared to 2013-14 is estimated at between Rs 40,000 crore and Rs 45,000 crore, or roughly 0.3% of Gross Domestic Product (GDP)," K Ravichandra, Senior Vice President at ratings agency ICRA said. "This is substantial when seen in relation to the budgeted fiscal deficit of the government of Rs 530,000 crore for the current fiscal," he added.
The twin benefits of lower subsidy outgo and higher excise duty collection would help to ease the pressure created by factors such as the low growth of the government's tax revenues so far in the current fiscal as compared to the 20% growth targeted in the Budget Estimates for 2014-15 and the delay in raising of substantial revenues through disinvestment.
The three state-owned Oil Marketing Companies (OMCs) had recorded under-recoveries of Rs 139,000 crore last fiscal. The government had provided Rs 85,480 crore as petroleum subsidy to cover up a part of these losses as against the budgeted estimate of Rs 65,000 crore. In the current fiscal, the government had estimated under-recoveries of around Rs 100,000 crore based on an average crude price of $100 per barrel. With the slump in crude prices, under-recoveries are now estimated at Rs 78,000 crore, based on average Indian basket price of $65 per barrel. While the government had budgeted for a subsidy of Rs 63,400 crore, crude slump has pulled down the estimate by Rs 30,000 crore.
Deloitte's Debasish Mishra says the oil price crash may not have come at a better time for the government. 'The government is utilizing the low prices to de-regulate diesel prices, increasing excise duty four times to improve the overall fiscal situation and passing on some benefit to consumers through cuts in petrol and diesel prices. Declining prices of fuel pulled down the inflation to zero level in November, the lowest in about five and half years, helping RBI to cut rates recently. As Indian economy is expected to grow at a rate of more than 6.5% in the next fiscal, a lower but stable oil price would certainly provide a helping hand." He said.
On the external balance front, analysts expect India's net oil imports to decline to $80-85 billion in the current fiscal from around $100 billion in 2013-14 due to lower crude oil prices. Despite this, the Current Account Deficit (CAD) is expected to reduce only slightly to $28-30 billion in current fiscal from $32 billion last fiscal. This is because the positive impact of low crude oil prices would be partly offset by a rise in non-oil imports such as electronics and gold and low export growth on account of weak demand from Europe and Japan, they say.
Next financial year, net oil imports are expected to decline further to $60 billion assuming an average crude oil price of Indian basket of $60 per barrel. A change in crude oil price of $1 per barrel impacts India's CAD by $1 billion. Analysts expect the current account deficit to be contained below 1% of GDP next fiscal.
