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What could possibly be the size of the fiscal bonanza accruing to the government from the historic fall in global crude oil prices this financial year? The total fiscal space created by lower fuel subsidy and higher excise collections in the current fiscal is an estimated Rs 45,000 crore, roughly 0.3 per cent of the country’s Gross Domestic Product (GDP).
“This is substantial when seen in relation to the government’s budgeted fiscal deficit of Rs 530,000 crore in the current fiscal. This would help to ease the pressure created by factors including the low growth of tax revenues so far this fiscal and the delay in raising of substantial revenues through disinvestment,” K Ravichandran, Senior Vice President at equity research and ratings agency ICRA told Business Standard.
The average global crude oil price has plummeted by over 55 per cent from a peak of $115 per barrel in June 2014 to less than $45 per barrel at present, the lowest in six years. The price slump is a result of rising global production, particularly from US shale oil projects, coupled with a slowdown in demand from major consuming nations in Europe and Asia. Lower crude prices are easing the pressure on government’s fiscal balances.
The government’s fuel subsidy burden is expected to decrease by Rs 30,000 crore from Rs 85,000 crore recorded last fiscal. The government had shared 61 per cent of the burden of the overall Rs 1,39,000 crore of under-recoveries of Oil Marketing Companies in 2013-14. Next fiscal, the government is likely to get a relief of Rs 25,000 crore on petroleum subsidy. Also, thanks to the lower crude prices, the centre has raised excise duties on petrol and diesel in four tranches since November 2014 which is estimated to fetch an additional Rs 15,500 crore this fiscal.
However, owing to the reduction in retail prices of various petroleum products, multiple state government are likely to witness a dip in sales tax revenues because sales taxes are levied on an ad valorem basis. Value Added Tax (VAT) on petroleum products accounted for 30 per cent of states’ total VAT collections in 2012-13. A few states have recently increased VAT rates on fuels.
Further, lower crude oil prices are likely to pull down India’s net crude oil imports this fiscal to $80 billion as compared to $100 billion in 2013-14. Analysts, however, expect the Current Account Deficit (CAD) to decline only moderately to less than $30 billion in the current fiscal from $32 billion last fiscal. This is because the positive impact of low oil prices is likely to be partly offset by a rise in non-oil imports including electronics and gold apart from low export growth.
