How oil can play spoilsport for govt’s fiscal math

  • Suchetana Ray, Hindustan Times, New Delhi
  • Updated: Mar 05, 2016 13:27 IST
The budget has announced a 3% cut down of the government’s subsidy bill of Rs 2.5 lakh crore. (Shutterstock Photo)

Will the budget math work out in favour of the government on the oil front?

The budget has announced a 3% cut down of the government’s subsidy bill of Rs 2.5 lakh crore. This has been largely due to a 10.2% reduction in petroleum subsidy.

A 3% reduction in the subsidy bill could save thousands of crores for the government. From Rs 30,000 crore in 2015-16, the bill could come down to Rs 26,947 crore in 2016-17.

But all this is assuming that oil prices remain at $35 per barrel for the fiscal year.

So what’s the oil story on the global front?

Historically, crude has been a volatile commodity. There was an initial surge in prices after Russia, Venezuela, Saudi Arabia and Qatar froze production in January.

But the lifting of sanctions against Iran by the US and the European Union in January made the country free to sell as much oil as it wants, and to whoever it wants. Moreover, Iran is also looking to raise production.

Then there’s Iraq, OPEC’s (Organisation of Petroleum Exporting Countries’) second-largest oil producer after Saudi Arabia. The country needs the money from selling crude to fund its internal wars.

“Unless Iran decides to freeze production, oil prices will be range-bound — They are likely to hover at $35 to $45 a barrel” said SC Tripathi, former secretary, oil ministry.

“The world is producing an extra 1.7 million barrels per day. There has to be a drastic production cut, otherwise prices will remain range-bound,” said RS Sharma, former CMD, ONGC.

But if geopolitics or a supply constraint set oil prices zooming, the government has a back-up plan ready to protect its fiscal math.

The Centre has the option of offsetting an inflated subsidy bill with an increase in revenue. “Introducing custom duty on crude imports and the advantage of the advalorem cess on oil will protect the government against sudden spike in crude prices” said Soma Banerjee, principal, energy and infrastructure, CII.

At present, there is no customs duty on crude imports. A 20% cess has been imposed on domestically produced oil in this budget, based on the price of the petro product.

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