New Delhi: The Narendra Modi government is in for a crude shock as oil continues its upward march beyond India’s comfort zone, making it increasingly difficult for it to shield fuel consumers without bleeding state-owned oil marketing companies (OMCs) and undermining its fiscal health.The fact that general elections are round the corner could complicate the government’s political challenges.Crude oil prices jumped 24% in the first three months of 2018, and have touched a four-year high in April owing to factors like output cuts by producers and geopolitical tensions. Ratings agency Crisil expects crude prices to average $70 per barrel for calendar year 2018, a 27% rise over the previous year.However, Saudi Arabia, the Organisation of Petroleum Exporting Countries (OPEC) helmsman, has hinted that it would like to see oil prices between $80 and $100 a barrel. If it has its way, $70 might well prove an underestimate for crude oil, upsetting the Modi government’s fiscal math.The government faces a stark choice between shielding fuel consumers from potential price shock and preventing OMCs from going into the red and reining in its fiscal deficit.If the Centre reduces excise duty on petrol and diesel to cushion fuel consumers from the impact of surging crude, it will have to take a hit on its revenue collection. Since its fiscal position is already precarious, it cannot afford to lose out on oil revenue.A surging crude could also increase the government’s subsidy burden on sale of domestic LPG and PDS kerosene, and aggravate its fiscal problem. Finance minister Arun Jaitley has allocated Rs 24,932.8 crore as petroleum subsidy in 2018-19, which could prove grossly inadequate.States’ and Centre’s greedStates too are fleecing fuel consumers, with sales tax or value added tax (VAT) as high as 40% on petrol and 28% on diesel. When domestic refiners hike petrol and diesel prices in line with movement in the global market, states’ revenue collection from sales tax on auto fuels too would go up automatically.After the Centre reduced excise duty on petrol and diesel by Rs 2 a litre, it appealed to states to follow suit with a reduction in sales tax rates for the auto fuels. However, the appeal went largely unheeded. So there is little possibility of the Centre getting states to agree on letting go of their power to tax the auto fuels to cushion consumers from the impact of surging crude price.Alternatively, if the Centre forces OMCs to go slow on price hikes and absorb under-recoveries on their balance sheets, the latter’s profitability could get dented. That would in turn spur investors to dump OMCs’ stocks. As reported by The Wire, these stocks are already under pressure as investors fear that OMCs may not be allowed to pass on the full increase in international prices to retail consumers.Data also show that in April, OMCs have been slow in raising petrol and diesel prices, which gives credence to the speculation that they have been asked by the government to partially absorb the increase in international prices.Significantly, global crude oil prices began their descent in the middle of 2014. The government used the crude price collapse to deregulate the retail pricing of diesel, besides hiking excise duty on auto fuels.Freed from government intervention in the retail fuel market, OMCs were able to pass on the full increase in global prices to consumers. Later, in June last year, they were allowed to shift to a daily price revision mechanism, which further improved their cashflow and helped raise profits.However, apparently on government diktat, OMCs took on a new commitments to invest in ventures of private players rather than use hefty profits to consolidate their own finances. If they are now asked to go slow on price hikes and absorb under-recoveries on retail sale of petrol and diesel, they might not have financial leeway to do so.If OMCs are not allowed to pass on the increase in global prices to retail consumers, their borrowings could rise sharply, increasing the interest burden on them. That will in turn eat into their profits.Surging crudeThe rise in crude prices, coupled with rupee depreciation against the US dollar, could negatively impact the OMCs over the medium term, credit rating agency Icra has said in a recent update.The price of Brent crude has soared to $73-74/bbl, its highest level since November 2014, primarily due to fears that the US would not extend the nuclear deal with Iran beyond May 12 and reimpose sanctions.In case sanctions on Iran are reimposed or new sanctions are levied after the deadline expires, its crude oil production could decline from 3.8 million barrels per day (mbd) now and (4.5 mbd in late 2017) to 2.5 mbd, which was the level prior to the removal of sanctions in 2015.Besides the threat of Iran sanctions, Saudi Arabia’s statement that OPEC members will need to continue coordination with Russia on supply curbs in 2019 has given momentum to the oil rally.According to global financial major Nomura, every $10 increase in oil prices would increase India’s current account deficit (CAD) by 0.4% and push up inflation by 30 to 40 basis points, clip growth by 15 basis points and widen fiscal deficit by 0.1% of GDP.If Brent oil averages $75 a barrel in 2018, CAD would widen to 2.5% of GDP from 1.5% in 2017, Nomura said. The benchmark Brent price averaged at 71.63$ a barrel in April, compared with 66.02$ the previous month. Over last 12 months, the price has risen 36.93%. The Brent spot price on Thursday stood at $75.39 a barrel.A surging crude could threaten the stability of the rupee, which has already depreciated 4.4% this year to the US dollar. Some experts have forecast that the rupee could breach the all-time low of 68.85 vis-a-dollar, the level that it fell to in 2013.
