Mumbai Feb 26 :- There’re ominous signs on the price front and the government’s fiscal side if crude oil prices remain at the current elevated level triggered by the Russian invasion of Ukraine.
If crude oil price rises to an average of $100 (or $90 per barrel) from the current average of $74 per barrel, inflation is likely to increase by 52-65 bps (32-40 bps), according to a research report from State Bank of India (SBI). Further, the government could face a revenue loss of Rs 95,000 crore to Rs one lakh crore on account of the oil price rise, the SBI report said. “We are, however, hopeful of a significant course correction in oil prices going by trends,” it said.
The average price of Indian basket of crude oil has risen to $84.67 per barrel in January 2022 from $63.4 in April 2021, a 33.5 per cent increase.
According to SBI calculations, every $10 per barrel increase in Brent crude price will lead to increase in inflation by 20- 25 bps.
Interestingly, petrol and diesel prices have not changed since November 2021. Based on the existing VAT structure and taking Brent crude price of $100-$110, diesel and petrol prices should have been higher by Rs 9-14 each as of now. If the government however reduces the excise duty on petroleum products and prevent the prices of petrol and diesel from rising, then the Government will incur excise duty loss of Rs 8000 crore for a month, SBI report said.
“If we assume that the reduced excise duty continues in the next fiscal and assuming petrol and diesel consumption grow around 8-10 per cent in FY23, then the revenue loss of the government would be around Rs 95,000 crore to Rs 1 lakh crore for FY23,” it said.
In this context, the FY23 budget numbers that are pegged conservatively would act as a clear counter cyclical buffer for such revenue loss, SBI said.
The inflation scenario changes if crude oil, food, services and housing prices remain at elevated levels. When taken this into account, there appears to be an upside risk of 87-100 bps to RBI’s inflation of 4.5 per cent for FY23 if oil price averages to $90 per barrel and 107- 127 bps upside if oil price averages to $100, the report said.
SBI said historical trends (since 2018) indicate that it takes around 18 months for crude prices to crash by as much 67 per cent from the highest level and 30 per cent drop from highest level could even come in less than 3 months. Thus, the decline in crude prices from the current high levels could come even faster going by the recent trends and it augurs positive for overall macro prognosis, the report said.
Retail inflation has moved up again to 6.01 per cent in January 2022. RBI expects inflation to come around 4.7 per cent in March 2022. For FY23, the RBI expects CPI inflation to be around 4.5 per cent. “However, we believe there is upside risks to inflation owing to multiplicity of factors including soaring oil crude oil prices,” it said.
