The unrest in Iraq, besides raising oil prices and fanning inflation, can also potentially upset the NDA government’s intent to contain the budget deficit and force a change in plans to free diesel prices from administrative fixing.
India spends $145 billion every year to meet two-thirds of its crude oil requirements from various oil producing nations. Iraq, earning close to $20 billion from India, is its second largest oil supplier after Saudi Arabia.
The tensions in Baghdad have pushed crude oil prices to a nine-month high of close to $115 a barrel, presenting the government with a dilemma: Allowing oil companies to raise fuel prices will push up inflation; low retail fuel prices would mean a mounting subsidy bill as it has to pay more to companies to prevent them from running into losses.
A weak rupee also impacts the government’s finances.
Every time the rupee depreciates by one rupee against the US dollar, Rs. 8,000 crore is added to the fuel subsidy bill. The rupee fell by 51 paise on Friday and closed at 59.76 against the US dollar.
A greater subsidy bill could also mean that the government may not be able to keep the fiscal deficit—shorthand for the amount of money it borrows to fund its current expenses—under manageable limits.
In the interim budget presented in February, the then finance minister P Chidambaram had pegged the fiscal deficit for 2014-15 at 4.1% of GDP, down from 4.5% last year.
The government had planned a fuel subsidy outgo of Rs. 65,000 crore in the last fiscal which later increased to Rs. 1.4 lakh crore due to high global oil prices and a depreciating rupee.
The oil price surge will also act as a spanner in the move to de-regulate diesel prices.
In wake of stabilising rupee and crude oil prices, the losses of oil companies on domestic diesel sales had dropped to just Rs. 1.60 a litre from Rs. 10 a litre six months back. However, the Iraq crisis may reverse the trend and losses on diesel could climb again.