BUDGET 2018

Jaitley's budget game plan – Oil price is the key

PTI9_22_2017_000040A [File] Finance Minister Arun Jaitley | PTI

The crucial juggling ball that Finance Minister Arun Jaitley needs to handle with care for his critical budget next month is crude oil, and its prices. The FM has always helped himself with subsidies and numbers in his previous Budgets.

But this time, the situation is different (read serious).

Oil prices have already crossed the $60 barrel mark for the current fiscal, and Jaitley knows there is one more quarter the nation needs to cover up. The government must get this going, Modi has – it is reliably learnt – told his Cabinet that the Budget must be turned to a strategic advantage for the party to garner some big votes, both for the upcoming state elections and the general election in 2019.

So lets look at the options before the FM

He must work on a generic, average-kind-of-a price band to keep the nation in a comfort level, lets not forget he has some big challenges like the after efects of GST and there’s the big, fiscal deficit to handle. And then, he has the pressures of the infrastructure and social sectors. Hence, he must figure out a cost between $65-$70 and cannot breach the numbers. But can he do it? The Finance Ministry – at this point in time – is not saying anything.

Critics claim that the government wants the price to be higher than $65 a barrel, may be $67 or $69. The FM must – in the limited time he has – close in on a price range at which Indian refiners are buying the crude. He knows the numbers are not on his side because the price was $64.52 a barrel towards the year-end. In comparison, crude oil has fluctuated from $52.49 a barrel in April to around $47.86 in June-July, rallying upwards from August, in November it shot up to $61.32 and touched $64.52 in December end. Higher crude prices would test the Modi government’s resolve to keep prices of auto-fuels at market-determined levels. If that happens, it will have serious, material implications for private marketers.

The average price at which Indian refiners bought their barrels once hovered around $52-$54. But the prices stood at $60.27 per barrel on November 17, 2017.

So how does Jaitley keep the price within control?

If he spikes the price, Indian companies would face a total increase in their requirements of working capital and the oil marketing companies will face some problems in their short-term debt levels. And if that happens, their profitability will be seriously, and more importantly, negatively impacted. There are other issues as well. If PSUs are pushed to share a part of higher gross under recoveries, it would turn negative for their profitability.

New Delhi does not have the numbers on its side. It continues to import a little over 80 per cent of its crude, the import bill stands at a whopping $53.1 billion, could eventually close for the fiscal at $80 billion.

Jaitley could cut excise on petroleum products if crude prices continue to flare and it will be considered a politically right move and help New Delhi smoothen the burgeoning impact of flaring retail prices. But it will be a decision not for Jaitley alone to take, he knows plugging a GST rate for petroleum products continues to be a bone of contention between the Centre and the States. So there exists a possibility that the FM might chop excise rates, even crude cess.

He has done that last October, slashing the basic excise duty on petrol and diesel by Rs 2 a litre. The revenue loss for the Centre was to be totalled at Rs 26,000 crore for the whole fiscal, and Rs 13,000 crore for the remainder of the current financial year.

And then, there is gas, of which very little being heard these days. The oil price has prevented the FM from offering incentives for LNG terminals, gas imports, gas infrastructure, and the shove for alternatives like methanol, bio-diesel and ethanol. There are some speculations at the BJP office in the Indian Capital that some move might come from Modi’s Pradhan Mantri Ujjwala Yojana — subsidised LPG distribution scheme for BPL families — as well as direct benefit transfer (DBT) of LPG subsidy.

Aware of the tensions, the government is making some moves, it announced new Hydrocarbon Exploration Licensing Policy (HELP), uniform license for exploration and production of all forms of hydrocarbon — Discovered Small Field Policy Bids round one. And then the Ministry of Petroleum and Natural Gas introduced the Open Acreage Licensing (OAL).

Mandarins of the Finance Ministry are confident that the uncertainty about the fiscal deficit is manageable and the hardening crude prices will not be a fiscal problem, given that domestic prices of petrol and diesel have been deregulated. There are some who feel that the government can make up the revenue shortfall by accelerating disinvestment, now that it has a hugely booming stock market in place. With its structural economic reforms, New Delhi – claim bureaucrats in Delhi – is well-cushioned to deal with any spikes in crude prices. What more, New Delhi remains confident that the barrel rates will not cross the $65 mark on a sustained basis because global markets are well supplied.

All eyes on the FM.

Disclaimer: The views expressed in this article are solely those of the author and do not necessarily represent the views of the publication.

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