Lower oil prices to cut subsidy outgo, support growth, cool inflation

Lower oil prices to cut subsidy outgo, support growth, cool inflation

Indian basket of crude, a crucial determinant of government finances in India, may turn out to have a weighted average annual rate, up to $5 barrel lower than assumed in the Budget for FY24, many analysts feel, even as they insisted that these were early days for a definitive forecast.

Lower crude prices mean multiple gains for India on the fiscal and macroeconomic fronts, as the country is heavily dependent on imported oil to meet its energy needs, and natural gas and urea, whose prices are linked to crude, are also imported by the country in large quantities.

Apart from the moderation in Brent crude and the OPEC basket prices, India has benefited from the surge in crude imports from Russia, at discounted rates. “In the absence of any global shock, it is unlikely that the average price of the Indian crude basket will breach $85/barrel in FY24,” India Ratings chief economist DK Pant said.

In the Budget, the government is understood to have factored in crude at $85/barrel for budget estimations on relevant heads. In FY23, the Indian basket averaged $93.15/bbl. Rating agency Icra expects the average international price for crude oil during FY24 to be in the range of $70-90/bbl.

“The Indian basket can be assumed to be about $3-5/bbl lower than the aforementioned price range owing to the purchase of discounted Russian crude oil,” Prashant Vasisht, vice president and co-head, ICRA, said.

The discounted rate for Russian crude led to an import surge with the country’s share jumping to 19.3% in India’s total imports of crude from just 2% in FY22, leading to savings of around $5 billion equivalent for Indian importers, according to Bank of Baroda chief economist Madan Sabnavis.

“In the first four months of FY24, the Indian crude basket averaged $77.39/barrel, in the absence of any adverse global shock, the Indian crude basket in FY24 may average around $80/barrel. However, the USD-INR exchange rate will also have an impact on the Indian economy,” Pant said.

A lower fertiliser subsidy in FY24 will give some fiscal space to the government to fund expenditures on other budget heads or take care of revenue shortfall, Pant added.

Given that the direct benefit transfer (DBT) for LPG is estimated to be just Rs 180 crore for FY24, a fall in crude prices won’t lead to any significant savings from an overall budget point of view.

However, lower natural gas prices, a key ingredient for urea, could lead to a reduction in fertiliser subsidies by around Rs 15,000 crore in FY24. The BE for fertiliser subsidy is Rs 1.75 trillion for FY24.

Fertiliser subsidy in FY23 stood at an all-time high of Rs 2.53 trillion, owing to the spike in global commodity prices.

However, prices of gas (LNG) have already halved to around $12-13 per mmBtu now from the last year’s level.

The major impact of lower crude prices is likely to be felt in inflation. Inflation of commodity group ‘Transport and Communication’ has declined to 1.1% in May 2023 from an annual average of 5.9% in FY23.

Similarly, inflation of commodity group ‘Fuel and Light’ has declined to 4.64% in May 2023 from an annual average of 10.3% in FY23.

“Major gain to the economy is likely to happen cooling off of inflation, which will push real wage rates in positive territory and once it remains positive for some time, we may see consumption demand rising, which will have a lagged effect on investment also,” Pant said.

While the RBI’s surplus transfer earlier in the year was positive for revenues, there are other pressures in the pipeline by way of higher fertiliser subsidy outlay, softer nominal GDP growth and the need for additional social spending, said Radhika Rao, Senior Economist, DBS Bank, Singapore.

“Potential gains on lower oil will help to offset a few of these emerging pressure points. We don’t expect an overshoot of the budgeted fiscal deficit target this year, with additional demands to necessitate a reprioritisation amongst the spending heads,” Rao said.

“(Also), the RBI estimates that a 10% fall in crude oil and assuming full passthrough to the retail prices, could prop growth by 15bp,” Rao added.

The Centre, which collected close to Rs 35,000 crore from windfall taxes on petroleum products in FY23 and will continue with the special provision, as a safeguard against abnormal price movement, will unlikely get much in FY24. The tax was imposed in July last year when crude shot up to over $100/bbl last year and was in vogue till it fell fellow $75/bbl. However, excise duty receipts will unlikely get affected as the budget factored in likely moderation on crude prices and the fact that lower prices (when prices are cut) might lead to higher sales volume, thereby more tax revenues.