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BW Businessworld

Oil’s Well For A Fit Economy

The one thing finance minister Arun Jaitley does not have to worry about much in this budget is how to meet the fiscal deficit target of 4.1 per cent. Much of that work is being done outside of the country: the Organisation of Petroleum Exporting Countries (OPEC) has decided to not reduce crude oil production. In the process, global crude oil prices are tumbling by the day. In the 200-odd days that Narendra Modi has been in power, the India basket of crude has fallen by almost 60 per cent from $108.05 a barrel (on 26 May) to $43.36 a barrel (on 14 January).

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The one thing finance minister Arun Jaitley does not have to worry about much in this budget is how to meet the fiscal deficit target of 4.1 per cent. Much of that work is being done outside of the country: the Organisation of Petroleum Exporting Countries (OPEC) has decided to not reduce crude oil production. In the process, global crude oil prices are tumbling by the day. In the 200-odd days that Narendra Modi has been in power, the India basket of crude has fallen by almost 60 per cent from $108.05 a barrel (on 26 May) to $43.36 a barrel (on 14 January).
 
That’s important for India, which imports close to 70 per cent of its crude oil needs. Last fiscal, India imported $143 billion worth of crude oil. The crude import bill during the first eight months (April-November) of this fiscal at $89.3 billion is already $6.11 billion lower than the $ 95.4 billion spent during the same period in 2013-14. Going by the way crude prices are falling by the day, the country could see a windfall of anything between $ 12 billion to $ 18 billion in lower crude import this fiscal. The spend on crude till now this year matches the $ 89.5 billion spent during the same period in 2011-12.
 
While the government has gained, not much of the benefit has been passed on to consumers. And definitely not to oil marketing companies that have been burdened with oil subsidies for years. While crude prices have fallen by 60 per cent, petrol prices in Delhi have been lowered by 16.7 per cent (from Rs 73.6 per litre on 1 July 2014 to Rs 61.33 on 16 December). Diesel prices are down a mere 11.8 per cent (from Rs 57.28 on 1 June to Rs 50.51 on 16 December).
 
That’s because the government decided to line up its coffers as crude prices slumped. While keeping fuel prices steady, it hiked excise duty thrice starting early November. What that meant was that while prices were not lowered, the government earned more. The excise on petrol was hiked by Rs 5.75 a litre over the period (Rs 1.50 a litre on 2 November, Rs 2.25 on 2 December and Rs 2 on 1 January). The excise on diesel was hiked by Rs 4.50 a litre (Rs 1.50; Re 1 and Rs 2). The three hikes will help the government net Rs 17,000 crore this fiscal, which is expected to be used for funding highway projects. 
 
With crude oil prices expected to breach $40 per barrel soon, Indian consumers could see a further cut in fuel prices soon. But, the real gainer has been the government, which should add to the kitty once the spectrum auctions are over and disinvestment also happens. Happy days are here again. 
 
(This story was published in BW | Businessworld Issue Dated 09-02-2015)