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Lower global oil prices positive for Indian fiscal deficit - Acuité Ratings & Research Limited

Posted On: 2020-03-16 11:52:42

- Amidst all the gloom in the global economy aggravated by the rapid spread of the Corona Virus, the lower global oil prices is a favourable development for the Indian macroeconomic and fiscal regimen.

- In a likely scenario where oil prices remain significantly below $50 per barrel in FY21, Acuité expects additional oil tax revenues of the order of Rs. 30,000-60,000 Cr which should strengthen the fiscal position to some extent in the coming fiscal.

- Acuité's analysis of past data indicates that India's fuel taxes are inversely proportional to oil prices, with the two variables negatively correlated. This has been primarily due to the government's intent to maintain the retail fuel prices in a stable band with moderate volatility while also capitalising on any global price declines with additional taxes.

- The revenue from oil taxes has steadily increased from Rs. 0.32 Lakh Cr to an estimated Rs. 1.7 Lakh Cr in FY20 and is expected to get a further push up in FY21 as against the budgeted figure of Rs. 1.8 Lakh Cr. While in FY14, the price per barrel averaged $103, it was just under $61 in FY20.

- The windfall can potentially pare the fiscal deficit in India by roughly 20 bps in FY21, if there is a moderate revival in the domestic economy and the budgeted nominal growth estimate of 10% holds good.

A study undertaken by Acuité Ratings reveals that the oil taxes in India are inversely proportional to the global oil prices with past empirical data suggesting that the negative correlation goes up to an extent of 80%. When the US nuclear deal with Iran in July 2015 led to a dilution in sanctions and triggered a supply glut and sharp decline in oil prices, the Government of India's budgeted tax revenues from petroleum products increased substantially. As per fiscal data, tax revenues from petroleum including cess and additional duties climbed sharply from Rs. 0.32 Lakh Cr in FY14 to Rs. 1.71 Lakh Cr estimated for FY20. While the price per barrel averaged $103 in FY14, it is averaging around $60 in FY20.

Acuité believes that the sharply downward trajectory in global oil prices, with Brent Crude currently plummeting below $35 since the first week of March 2020 along with India's ongoing fiscal compulsions is set to unfold a similar story. Says Sankar Chakraborti, CEO, Acuité Ratings & Research, "While the impact of the oil price decline may be negligible in FY20, it is likely to have a significant positive impact on the fiscal print in FY21. The revised or actual oil tax revenues are likely to be substantially higher than the budgeted figure of Rs. 1.82 Lakh Cr in the coming fiscal; we estimate that the additional revenues from the latter can be between Rs. 30,000 - 60,000 Cr. The actual windfall will however, depend on three factors which are (i) the sustainability of the global oil prices below $50 per barrel (ii) any decision of the government to pass on the cut in global prices substantially to the domestic retail prices which we believe is unlikely at this point and (iii) any unexpected depreciation in the rupee brought about by the risk-on environment in the global markets impacted by the virus scare. Adds Mr. Chakraborti "The windfall from additional oil tax revenues can offset the likely pressures on the fiscal deficit; with a moderate economic revival and a nominal GDP growth of 10%, the fiscal deficit figure for FY21 can be pared down by 20 bps."

The underlying assumptions taken by Acuité for the fiscal windfall are that the average crude oil price for India's purchase basket will remain below $50 for much of FY21 and average around $41, the level that had been seen in FY16. Further, our assessment is that the union budget for FY21 has projected the average crude cost per barrel to $61, similar to what has been the average levels in the whole of FY20. Subsequent to the removal of the US sanctions in FY16, the supplies from Iran had picked up and the global oil market witnessed an incremental supply of 1.5-2.0 million barrels per day. It is likely that the current breakdown in talks and the lack of consensus between Saudi led OPEC and Russia will lead to a similar addition to the global supply. However, the global economy is in a weaker shape vis--vis FY16 and therefore, the impact on prices can be even more severe along with higher volatility.

Notwithstanding these headwinds for the oil industry, the prices may stabilize sooner than expected with agreements on production cuts since such low prices below $40 are not sustainable for the key oil producing nations from a fiscal perspective. However, there is a strong possibility that the prices will remain below the mean threshold of $50 per barrel as that is the reported point of viability for another significant alternative to the traditional oil sources i.e. the American Shale Gas industry, which is likely to be the primary target for the additional supply.

From the domestic stand point, India's daily petroleum product consumption for FY20 (YTD) has averaged 4.3 million barrels (equivalent), just 0.6% higher than what the country consumed in the previous year. We reckon that the consumption levels will remain largely at the same levels i.e. around 4.32 million barrels in FY21. This will additionally absorb exchange rate pressures that are triggered by increasing import volumes. We expect that any moderate slide in the rupee dollar exchange rate in the current context will not significantly offset the expected gains on the oil import bill. In FY20, India is expected to import 16% less crude (which includes crude intended for refinery exports) by volume and 24% by value, a trend that may somewhat compensate for the depreciation of the rupee in FY21 as well.

Source: Equity Bulls

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