Global crude oil prices could soar up to $120 a barrel in the near-term on heightened crisis in Iraq, analysts warned on Wednesday, compounding worries for the Modi government barely weeks before it presents its first budget in July.
Bank of America Merrill Lynch analysts said in a note that $125 per barrel for brent — near the highs hit in 2011 and 2012 — is on their watch list.
Crude oil had touched had all time high of $147 a barrel in July 2008, and analysts warned the crisis in Iraq — India’s second biggest oil supplier after Saudi Arabia — could again touch such alarming levels.
“The hardening of crude oil prices by $3 a barrel can dig a hole of anywhere between Rs 20,000 crore to Rs 25,000 crore in the government’s budget for 2014-15, as oil subsidy costs would go up,” a senior government official said.
With every dollar that oil prices rise, the government’s oil subsidy bill goes up by Rs 7,500 crores. The Centre releases subsidy to compensate state oil firms for selling diesel, kerosene and cooking gas at below cost.
The Narendra Modi-led BJP won a landslide in the recent national elections, but has to deliver quickly on its electoral promises to cool inflation and revive the economy from a quarter-century slump.
The government needs to spin jobs for tens of millions of restive hopefuls — to fulfill its poll pledge of ‘Aache din aane wale hain’ (good days are ahead) — while the elbow room in the treasury remains extraordinarily tight in the backdrop of high inflation and borrowing rates.
Higher oil prices could potentially swell the government’s subsidy bill and make it difficult to the achieve the fiscal deficit — a measure of the amount the government borrows to fund its expenses — target of 4.1% of GDP in 2014-15.
Read: Militants attack Iraq's largest oil refinery in major offensive
“If oil prices remain high even for three to four months around $120 a barrel, it could have a significant impact on the fiscal deficit and economic growth,” news wire Reuters said quoting a senior finance ministry official.
India, the world’s fourth-largest oil consumer, imports around 4 million barrels a day of crude oil, costing $165 billion a year at current prices.