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CAD, inflation in focus as oil inches towards $50 a barrel

business Updated: May 25, 2016 08:32 IST

NEW DELHI: The Indian basket of crude oil closed at $45.89 on Monday, almost doubling since January 20, 2016, when it was $24 a barrel. If the trend continues, it will worry the country’s policymakers, who will be under pressure to tame inflation, prevent a fall of the rupee, and contain the fiscal and current account deficits.

Uday Kotak, Kotak Mahindra Bank vice-chairman and one of India’s most credible voices in the financial world, has flagged concerns in a recent tweet where he cautioned that India’s “honeymoon” with inflation and current account deficits (CAD) may be over.

It could raise transport bills and the make air travel dearer as diesel, petrol and jet fuel bills, move in tandem with global crude prices.

At $45.89, crude prices are still less than half of the levels of $109 a barrel when the Narendra Modi government assumed office two years ago, but is nearly double since January when crude prices touched $24 a barrel.

Airlines say rising oil prices will not only make air travel costlier, but will have a significant impact on their finances as well.

Aviation turbine fuel (ATF), or jet fuel, in India is priced on an average about 60% higher than internationally. It is the singlelargest element contributing to airline costs and accounts for 45% of the operating cost of Indian carriers — as against a figure of only 20% for international carriers.

Domestic carriers pay up to 50% more for fuel than those in Dubai, or Singapore.

Rise in fuel prices will have a direct impact on fares, say airlines. This, in turn, will have an adverse impact on growth. “If operational costs of airlines go up, it would have a direct bearing on their finances,” said a senior executive of a budget carrier.

Low crude prices last year had a direct impact on airline profitability. IndiGo and SpiceJet, which are both listed companies, have reported record profits. Even debtladen national carrier Air India is likely to report operating profits for the first time since its merger.

Low fuel prices had resulted in a drop in airfares leading to a sharp rise in air passenger traffic with a significant chunk of train travellers upgrading to air travel.

“Airfares were down around 25% during the January-March 2016 quarter on a year-on-year basis,” said an airline official.

Air passenger traffic grew by 23.22% during January-April this year with domestic airlines carrying 30 million passengers as against 25 million the year before.

To account for the declining oil prices, the government had raised excise duty on both petrol and diesel five times in 2015-16 to shore up tax revenues. The latest hike was affected on January 30, 2016 when the government raised excise duty by ` 1 per litre on petrol and ` 1.50 on diesel.

However, government officials ruled out an immediate cut in taxes to cushion consumers from higher crude prices.

“The idea of deregulation of fuel prices was to sync it with the global prices. As far as excise duty component is concerned, tax policies are made for a longer term and I think they should not be tinkered at short-term fluctuations,” chief economic adviser Arvind Subramanian told HT.

Lower excise duty can insulate consumers from a price shock, but can cut the government’s revenues by several thousands of crores of rupees.

Costlier crude can push up India’s oil import bill. Greater demand for dollars can push down the rupee’s value and widen the CAD — a broader measure of the difference between dollar inflows and outflows.

Persistently low crude prices have shrunk India’s oil import bill from $112 billion in 2014-15 to $64 billion in the last fiscal.

“Hardening of oil prices is definitely going to push the inflation and CAD a bit, but I think we are comfortable till the time the prices remain in the $5-55 per barrel range. This range is manageable for the economy as of now,” Subramanian added.

India’s subsidy bill and a 3.5% fiscal deficit — shorthand for the amount of money the government borrows to fund its expenses — have been worked out factoring in crude oil prices at $35 per barrel for this fiscal year.

“I do not think it will impact our fiscal math,” Subramanian said.

Experts say that oil prices are likely to move within a range.

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

Former chairman and managing director of ONGC, RS Sharma said: “The world is producing 1.7 million barrels extra per day. So there has to be a drastic production cut, otherwise oil prices will remain range-bound.”

(With inputs from Tushar Srivastava)