Every Budget releases the initial (Budgetary Estimates or BE) of government finances --- tax revenues, non-tax revenues, expenditures, deficits, subsidies, etc. Those are revised (RE or revised estimates) and finalised as more data comes in during the financial year in question and afterwards. That is every Budget also contains RE about the ongoing financial year (February 2015 for example, had data about 2014-15).
One of the big breaks for the government in 2014-15 was the sharp drop in crude oil prices towards the second half of the financial year. From around $110 a barrel in June 2014, prices dropped to multi-year lows of $45 a barrel in January. Since then, prices have lifted to around $64-65 a barrel, with most of the gains coming in the last month. These prices are for the benchmark Brent crude contract --- the Indian crude basket is usually priced fairly close to Brent.
Making sense of the international crude market is incredibly hard. Small percentage changes in global supply or demand, or even anticipations of small changes, can lead to big price swings. Over the past year, the slow global economy has meant that there is low demand. The Organization of the Petroleum Exporting Countries (Opec) can decide to throttle back production if it believes there is over-supply.
But there has also been the shale/tight oil revolution in the US where technology has allowed for the exploitation of previously untouchable deposits. However, shale is relatively expensive and it seems Opec is going to keep supply up to undercut shale. There is also a genuine prospect of Iran coming back into the market if sanctions are lifted. So, the supply -demand situation should remain easy through the current financial year and if it does, prices should not move up much from the current levels.
The Budget makes calculations on fuel and fertiliser subsidies on the basis of an assumed average price for the Indian crude basket. The February 2015 Budget apparently assumed prices would average out at $70 a barrel over 2015-16. April and May prices have stayed comfortably below that average. But if the crude basket continues to see rising prices and those move beyond $70 a barrel in sustained fashion, subsidy estimates will go awry.
Lower crude oil prices have handed the government a $50 billion windfall in the form of lower subsidies. It has also allowed for freeing retail prices of petrol and diesel, and some rationalisation in the prices of gas. Things eased off enough for the government to spare its energy PSUs (public sector undertakings) like Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) from sharing the subsidy burden. There was a dramatic recovery in the share prices of PSU oil marketing corporations like Bharat Petroleum Corporation Ltd, Hind Petroleum and Indian Oil. Private sector refiners such as Reliance have also benefited from better refining margins.
Given long-term oversupply and the current pricing structure, things should be ok with the Budgetary Estimates. However this situation is worth watching even for those who don't play the commodities futures markets. If crude oil prices move above $75-77 a barrel and stay elevated, there will have to be readjustments on several fronts.
I hope the government will have the consistency to allow retail pricing of petrol and diesel to remain free. But it may not. It will have to reset subsidy estimates and it may decide to force ONGC, OIL and maybe GAIL, to bear some of the subsidy. Also of course, inflation will rise and the rupee could fall if the import burden climbs substantially. The impact on energy sector players will be most immediately apparent but there will be impacts on most sectors of the economy.
The author is a technical and equity analyst
