Rediff.com  » Business » How COVID-19 spoilt India's oil bonanza

How COVID-19 spoilt India's oil bonanza

By A K Bhattacharya
May 01, 2020 08:58 IST
Get Rediff News in your Inbox:

'The impact of COVID-19 on the economy has been so overwhelming that even a significant drop in global oil prices, which in normal times would have brought cheer, has posed new challenges for the government,' observes A K Bhattacharya.

Photograph: Reuters
 

International crude oil prices have been falling at a rapid pace.

Brent crude oil price was $58 a barrel at the end of January.

It has now dropped by about 65 per cent to $20 a barrel, principally because the outbreak of COVID-19 and the consequent decline in economic activity have destroyed demand in large parts of the world.

The proposal for a production cut by members of the Organisation of the Petroleum Exporting Countries (OPEC) by about 10 per cent of global output is now considered too small to make an impact.

In any case, the production cut was to take effect from May.

Meanwhile, US oil futures have nosedived to reach their first-ever sub-zero level, and all this because of concerns that the United States will run out of storage because of a glut caused by the lockdown imposed in the wake of COVID-19, a global pandemic ravaging the world.

What do these developments in the global oil market mean for India?

Conventional wisdom is that when crude oil prices drop, India benefits as it is dependent on imported oil to the tune of about 85 per cent of its total consumption.

But COVID-19, along with the lockdown imposed on the Indian economy in a bid to control the spread of the disease, means that this will perhaps be the first occasion when the Indian economy will not be in a position to take advantage of a drop in crude oil price.

Already, India's domestic consumption of petroleum products has been adversely affected.

For the first time in many years, the growth in India's domestic consumption of petroleum products was almost flat in 2019-2020.

At 213.69 million tonnes, total petroleum product consumption grew by 0.22 per cent last year, compared with 213.22 million tonnes in 2018-2019.

It is true that the slowdown in domestic consumption of petroleum products had begun in 2018-2019, when it grew by only 3.4 per cent, almost half of the growth of 6 per cent recorded in 2017-2018.

But the pace of the slowdown will certainly increase in 2020-2021 and, in fact, the total consumption may even show a contraction.

The consumption of petrol and diesel in the first half of April fell by 60 per cent.

A mild recovery could take place from the latter half of May.

But the pace of increase in consumption is likely to be slow, even if you consider the highly optimistic forecast of a 1.9 per cent economic growth made by the International Monetary Fund for India in 2020-2021.

There are at least three broad trends that are becoming quite evident as far as the impact of falling oil prices on the Indian economy and government finances is concerned.

One, India's import bill on account of oil should shrink significantly.

In 2019-2020, India's import bill on account of oil declined by 8 per cent to $129 billion.

But neutralising a part of this benefit for the country's trade balance, India's exports of petroleum products too shrank by 8 per cent to about $43 billion.

This trend is likely to be maintained in the current year as well.

So, a huge windfall gain on the current account should be ruled out.

Two, the government's revenues from the oil sector will take a hit.

For the Centre, the impact will be less as most of the taxes on the petroleum sector are specific in nature and not based on the price of the products.

Its revenue will be hit more because of lower consumption.

For 2019-2020, excise revenues from the oil sector are set to see a shortfall of 12 per cent and the shortfall in 2020-2021 will be even bigger as achieving an excise growth rate on petroleum products of 22 per cent will be an almost impossible task.

For the states, the collection of sales tax and value added tax on petroleum products will suffer more as these are mostly ad valorem rates or linked to the price of the products.

Sales tax or VAT levied by state governments on oil products fetched a total revenue of over Rs 2 trillion in 2018-2019, accounting for about 16 per cent of their total own tax revenues.

Since, the price has declined, the revenues will fall further.

The implications for the central as well as state finances, therefore, are going to be quite serious.

Three, oil refining and marketing companies may have a relatively good time with higher margins.

Note that even as the Indian basket crude oil price for Indian refineries dropped to $33 a barrel in March, down sharply from $54 a barrel in February, the retail selling prices for petrol and diesel (two major products they market) have seen hardly any change since the middle of March.

Petrol has been selling at about Rs 69 a litre in Delhi for more than a month now and diesel at about Rs 62 a litre.

Crude oil prices have fallen further in April and this should mean additional gain for the refiners.

But it is most likely that the oil refiners and marketers may not get the full benefit as the Union government may raise the excise duty and divert the oil companies's gains for the exchequer.

It did so in March and may do it again as fiscal pressures are on the rise.

The government has already got a new law passed by which it could raise special excise duty on petrol and diesel by Rs 8 per litre from the current level of Rs 10 a litre and Rs 4 a litre, respectively.

Since international crude oil prices are falling, the levy of these additional duties would not make a difference to the final selling price, although the government would get more revenue and the oil refining companies would lose a part of their extra margin that they would have otherwise gained.

In short, the impact of COVID-19 on the economy has been so overwhelming that even a significant drop in global oil prices, which in normal times would have brought cheer, has posed new challenges for the government.

Get Rediff News in your Inbox:
A K Bhattacharya
Source: source
SHARE THIS STORY 

Moneywiz Live!