In 2003, before the Congress-led United Progressive Alliance (UPA) came to power, the global crude oil price per barrel was under $30. It shot to over $90 in 2008 and then crossed $100 by 2013. In this 10-year period under the UPA, thanks to ballooning oil prices, India’s petro-subsidy bill amounted to Rs 8.5 lakh crore. Only at the fag end of its second term, did the UPA try to do away with the oil subsidy that was eating away at taxpayers money like a termite would do to home furniture. But digging a well when the house is on fire could only help so much. The runaway inflation on top of rising oil prices sounded the death knell for UPA. Enter Narendra Modi. The gods were kind to the new Prime Minister. Global crude oil crashed back to $40 a barrel. However, the Modi government didn’t pass off the bonanza to consumers. It raised taxes and diverted the massive earnings to funding infrastructure projects and bridging fiscal deficit. Inflation, which was in double digits and had become the bane of the UPA, also came crashing down.
For the past three years, crude prices hovered in the $40-$50 range, only recently crossing $55, which forced the government to cut excise duty. But all was still well. Until now.
India’s and the world’s honeymoon with low oil prices may be finally coming to an end.
Almost a year after Prime Minister Modi announced demonetisation - a move that has become synonymous with his government’s anti-corruption drive, Saudi Crown Prince Mohammed bin Salman (MBS) has launched his own war on corruption in his country. (MBS recently bought a $500 million superyacht so one must take such anti-corruption crusades in the Middle East with spoonfuls of salt).
In the ongoing royal purge, Saudi Crown Prince has arrested some of the country’s wealthiest individuals worth billions of dollars. Two princes have died conveniently – including the son of a former crown prince. Such are the ways of destiny. Lebanon’s Prime Minister Saad Hariri resigned when he was in Saudi Arabia citing assassination threat from Iran and accused the Shia nation of interfering in his country’s internal affairs. Oh, the irony of it all! At the same time, Israel has been conducting military exercises on its southern border with Lebanon and Syria. Saudi Arabia has accused Houthi rebels in Yemen of firing a ballistic missile at its capital, Riyadh, blaming Iran for funding them, saying that it could be called an act of war. This may give MBS more authority to intensify his war in Yemen which he launched two years ago to crush Iran backed Houthis.
Clearly, MBS’ actions are not limited to Saudi alone. Apart from the power putsch at home, he is trying to tighten the noose around Iran. And somehow Israel and the United States seem to be in on all of this. Foreign Policy speculated yesterday that US President Donald Trump’s son-in-law Jared Kushner, Israel president Benjamin Netanyahu and MBS may be cooking something dangerous in the cauldron i.e. Middle East.
It is no surprise then that markets are sensing the approaching storm. Crude price shot to a 28-month high of $64.10 per barrel and could go up further. Here are eight reasons why this is bad news for India.
First, as the domestic oil prices go up, the government will be forced to cut excise duty further. This has consequences. According to Citi Research, every Re 1 per litre decline in excise duty (for both diesel and petrol) would result in a revenue loss of Rs 13,000 crore for the government. In fiscal year 2016, the government reaped a bounty of Rs 1,54,590 crore from excise duty on petrol and diesel – comprising 54 per cent of total excise duty collection! If the government cuts duty on oil, then it can spoil the government’s chances of staying on course of fiscal consolidation.
Second , a large chunk of the collections from petro taxes was going into funding infrastructure projects. Last year, Finance Minister Arun Jaitley had allocated Rs 3,96,135 crore for creating and upgrading infrastructure. Recently, the government set an ambitious target of spending almost Rs 7 lakh crore on Bharatmala roadways programme. Though, most of the funds were to come from budgetary allocations and market borrowings, oil taxes were acting as a cushion for the government and if that is removed, the government’s ability to allocate a large chunk for infra spending may be impacted.
Third, high oil prices will push up prices across the board. This will drive up costs from production to transportation to services. Inflation which has remained benign for the last three years may raise its head once again and push us back towards high inflation and low growth scary days of the UPA. The Bharatiya Janata Party (BJP) government will certainly not like that given it will soon be entering into its final year and with so many state elections around the corner. Pushed to the wall, it may resort to populist measures which may hurt the economy and postpone growth recovery. Economy can hardly take another disruption.
Fourth, the Reserve Bank of India (RBI) has been too hawkish in its monetary policy decisions. Its target is to keep inflation within 2-6 per cent range. Even when inflation has remained in the comfortable half (less than four per cent) of the target range, the central bank has shied away from cutting rates. It even changed its stance from “accommodative” to “neutral”, confounding everybody. It has delayed rate cuts citing this or that reason. It termed Goods and Services Tax (GST) inflationary when its impact on overall inflation was barely 12 bps. It seems that it only needs an excuse, no matter how weak, to not cut rates. Though not substantial, high interest rates (compared to the rest of the world) certainly have played a role in delaying private investment, however, majority of blame should still go to twin balance sheet problem. With the prospects of global crude oil prices rising, one wouldn’t be surprised if the RBI in December may even drop the pretense of staying neutral and start raising rates. When it has not been rational in the past one year, there is no reason to hope they would start now.
Fifth, low oil prices helped the Modi government to end the phase of doling out lakhs of crores of petro subsidies. It gave way to reforms in the sector and finally market-determined pricing regimes was established. If crude prices increase too much and the excise duty cushion goes away, then we might return to the same old administered price mechanism. This will be a huge setback.
Sixth, oil marketing companies (OMCs) are finally enjoying healthy finances thanks to the freedom the Modi government has given them to price based on demand and supply conditions. Under the UPA government, they were kept afloat by subsidies. Reverting to the old setup would be highly detrimental to both taxpayers as well as OMCs.
Seventh, a huge drop in oil prices followed by similar drops in aviation fuel prices helped usher in a revolution in airlines sector. While it was reeling under heavy debt before, the sector has emerged as a preferred choice for long distance travel, beating Railways, thanks to low ticket prices that came as a result of low aviation fuel prices. More than 13 crore passengers travelled via flights in 2016, 10 crore of which were domestic passengers, making India the fourth biggest civil aviation market in the world. Low jet fuel prices not only helped passengers but also airlines which improved earnings and their finances. Going back to the old ways would spell bad news.
Eighth, most of our oil comes from the Gulf, including Islamist states like Saudi Arabia, Iran and Iraq as Swarajya had pointed out in this article and ‘higher demand means enriching these Islamist governments, which means the surpluses generated in their budgets will partly be spent on promoting Islam and jihadi groups and mosques and madrassas. It is not in India’s, or the world’s interest, to enrich the Islamist sheikhdoms of West Asia.’ Though, MBS has promised that Saudi Arabia will revert “to what we followed – a moderate Islam open to the world and all religions,” adding that “what happened in the last 30 years is not Saudi Arabia. What happened in the region in the last 30 years is not the Middle East.” But it would be too naive to take Saudi Crown Prince’s tall claims at face value. For all practical purposes, the current conflict is between Saudi backed and Iran backed entities in the Middle East and it won’t get resolved without bloody wars and fuelling extremism, which will have grave consequences for India too.
There are some welcome developments too due to a sudden surge in crude prices: a much needed correction is happening in the markets and with the rupee. However, this might raise our import bill, it will also help in boosting exports to an extent. High oil prices will further underline the importance of shifting to renewable sources of energy and nuclear power. At a time when the national capital region is choking under pollution, this is a timely reminder. Instead of opting for luxury vehicles, people will be nudged into picking fuel-efficient alternatives.
But all said and done, we should not forget that the aforementioned positive of high oil prices can also be reaped by raising excise duties.
So, while high oil taxes are good for India, high oil prices are not.
Arihant Pawariya is Senior Editor, Swarajya.
An appeal from Swarajya
At Swarajya, we rely on our readers' support through subscriptions to sustain our media platform. Unlike larger conglomerates, we are unable to relentlessly chase advertising money — our model is largely built on your patronage.
Your support has never been more crucial. We work tirelessly to deliver 10-15 high-quality articles daily, ensuring you receive insightful content from 7 AM to 10 PM.
If you believe India's story has to be articulated in a way it has never been done before without shrugging it off, become a patron (or) subscribe now for ₹̶2̶4̶0̶0̶ ₹1999 and get 12 print issues, unlimited digital access for 1 year, a special India that is Bharat T-shirt (Offer ends soon).
We are counting on you!