Crisis in Ukraine is a pain for RBI and Finmin

The crisis will increase cooking gas, petrol and other fuel bills for Indian households and businesses. But this is not the only concern for the crisis managers of the Indian economy.

Depending on how long the global oil prices last, the tension could put a question mark on the credibility of the RBI in making inflation projections and upset the government’s budget calculations. Especially the fiscal deficit.

Rising steadily over the past several weeks as war clouds over Ukraine, crude oil prices broke the $100 a barrel mark on Wednesday as Russian President Vladimir Putin sent troops to Ukraine.

Crude oil prices could remain above $100 a barrel in the near to medium term unless OPEC decides to ramp up production, Crisil Research said in a note on Thursday, as the world grapples with Russian attacks on Ukraine. have seen. But over the past three months, OPEC members have not been meeting their production targets, keeping prices under pressure. Earlier in January, India’s Petroleum Minister Hardeep Puri had a phone call with Sultan Al Jaber, Managing Director and Group Chief Executive Officer (CEO) of Abu Dhabi National Oil Company (ADNOC), the national oil company of the oil-rich UAE. (UAE), to nudge crude oil-producing countries without great success in order to increase production and reduce prices.

CLSA India estimates that a two-month hike in oil prices by $150 a barrel takes the average annual oil price estimate to $88 a barrel.

Ahead of the Union Budget on February 1, the Indian basket of crude, estimated at the average price at which domestic refiners buy crude, had risen from an average of $80.64 per barrel during November 2021 to $88.23 per barrel.

This should have had a somewhat serious impact on India’s official estimation-making system. And yet, the Economic Survey – prepared under Sanjeev Sanyal, who was promoted to secretary-level rank while moving from the finance ministry to the Prime Minister’s Economic Advisory Council – was released three weeks ago, the assumption Assuming that oil prices will average $70-75 per barrel in FY23.

Days after the Budget was presented, Governor Das defended the RBI’s estimate of average retail inflation of 4.5% in FY13, saying it was robust and took all possible scenarios into account. He declined to say what crude oil price assumptions are involved in preparing the estimates. But hardly any economist in the country is willing to put his weight behind RBI’s estimates, at least at this point of time.

Retail inflation rose to 6.01% in January, breaking the upper tolerance level set by New Delhi. And for the 10th consecutive month, wholesale inflation remained in double digits, coming down to 12.96% in January.

This is when, despite a sharp rise in crude oil prices, retail prices of fuel have remained unchanged for more than three months now from November 4, 2021, and are likely to rise next month, when the five-state assembly The elections, which include Uttar Pradesh, are being seen as an early sign of the political mood in the country, with less than two years left before the next Lok Sabha elections, due in 2024.

Rather optimistically, Sitharaman’s budget did not make any provision for a cut in excise duty in case crude oil prices continue to remain high. If the government decides to absorb oil price shocks rather than pass them on to end users, the fiscal deficit will widen. CLSA estimates that for every $10 per barrel increase in crude oil prices to be budgeted, the fiscal deficit as a percentage of GDP will increase by 43 bps.

To keep prices at the current level, by how much will Sitharaman have to cut taxes on fuel? 830 billion. This would increase the already high fiscal deficit by an additional 0.3 percentage points to GDP. CLSA estimates that the higher fiscal deficit will increase the government’s net borrowing to $11 billion and the additional supply of government bonds from $74 billion to $84 billion.

India’s gas requirements are thankfully met with contracts with Qatar. Where supplies are unlikely to be affected if the war does not end. The impact of higher gas prices will be felt in India though like elsewhere. Higher crude oil price also means more expensive LPG or LPG. The price of domestic LPG cylinder also remains unchanged from October 6, 2021.

India’s vulnerability to price volatility stems from its dependence on imports for 85% of its oil needs and a steady decline in domestic crude oil production, which declined from 38.1 MMT in FY12 to 30.5 MMT in FY21. happened.