Number Theory: An oil slick over govt's fiscal plan for elections?

The government’s balancing act between inflation and fiscal prudence could become even more difficult

At a time when the government is focused on managing the consequences of a deficient monsoon and its impact on food prices, it is likely to face trouble from another front. The price of India’s crude oil basket (COB), according to data from the ministry of petroleum, climbed to $89.8 per barrel on September 4. This is the highest this number has been since November 11, 2022 according to data from the Centre for Monitoring Indian Economy (CMIE). With oil prices expected to stay at higher levels in the run-up to 2024 elections, the government’s balancing act between inflation and fiscal prudence could become even more difficult, although the availability of cheaper Russian imports could provide some cushion . Here are three charts which explain this argument in detail.

The price of India’s crude oil basket (COB) climbed to $89.8 per barrel on September 4

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  August’s Crude Oil Basket price was the highest since November 2022

  The monthly average price of India’s COB was $86.4 per barrel in August . This is the highest since November 2022 when it was $87.6. While the November 2022 price signified a correction in India’s energy costs -- prices were much higher in the earlier period -- the August 2023 number shows that they are on an increasing trajectory with an increase of more than $10 within just two months. If the opening price for September is any indication – it was $89.8 per barrel on September 4, the only day for which this data is available in the month – the average COB price could end up even higher in September.
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  Price forecasts suggest that prices will remain higher than their recent levels until the 2024 elections

  A forecast from the U.S. Energy Information Administration does not paint a good picture on the oil price front. USEIA projects that the price of Brent Spot Average is likely to stay in the range of $86-88 per barrel up to March 2024 which is when the 2024 Lok Sabha elections are likely to begin. It is important to reiterate that the energy price environment was much more benign before the 2019 general elections. While the price of India’s COB was $77.9 and $80.1 in September and October 2018, it fell sharply to just $57 per barrel by December 2018 and stayed under $67 until March 2019.
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  The recent oil price surge will increase the fiscal cost of a cut in petrol-diesel prices

  The government announced a cut in the prices of LPG cylinders last week. Until recently it was widely believed that the government would have been able to cut prices of petrol-diesel as well, as oil marketing companies (OMCs) were making record profits due to a fall in crude prices with no concomitant reduction in retail prices of petrol and diesel. With crude oil prices rising significantly and expected to stay at higher levels, a reduction in prices of petrol diesel will become more difficult. “Unlike in LPG, current international crude and product prices do not give OMCs room to cut petrol/diesel retail prices on their own. Any potential reduction in petrol/diesel prices may need to come via excise duty cuts, which cannot be ruled out in the run-up to crucial state elections. Last time also before the November-December 2018 state elections, excise duty on petrol/diesel was cut by R 1.5/litre. The challenge is that excise duties are already back to their pre-Covid levels leaving little space for further cuts”, Citibank Chief India Economist Samiran Ckaraborty said in a research note on August 30. Any reduction in excise duty to bring down petrol-diesel prices could lead to a shortfall in revenue for the Centre. “We estimate that a R5/litre cut in excise duty would entail a fiscal cost of INR 400-450 billion (0.15% of GDP) for September-March FY24 and bring down inflation by 10-15 basis points”, the note added.
• To be sure, India could still enjoy some discount from Russian oil imports

  While the discount India was enjoying by importing Russian crude oil has fallen significantly over time, this could still provide some cushion to India’s energy import costs in the run-up to the elections. A Bloomberg article published on August 11 said that while the gap between Russian crude and the Dubai benchmark had fallen from $20 per barrel earlier this year to just about $8 per barrel, India’s government owned oil refineries are unlikely to stop or significantly reduce their consumption of Russian crude oil given the fact that it is still significantly cheaper than other options. “According to official figures, in June, the average cost of Russian crude landing on Indian shores including freight was $68.17 per barrel, the lowest since Moscow’s invasion of Ukraine. That compares with shipments from Saudi Arabia, which amounted to $81.78”, that article added.