Rising oil can burn Rs 1-trillion hole in govt coffers in FY23: SBI report

Rising oil prices that have shot up over 21 per cent in the past one month to hit $105 a barrel recently in the backdrop of the ongoing Russia – Ukraine geopolitical conflict spell trouble for the Indian government and can upset its fiscal math.

According to a report by the economic wing of State Bank of India (SBI), rising crude oil prices can burn a hole as big as Rs 1 trillion in government’s coffers in fiscal 2022-23 (FY23). Despite the rise in oil prices, the Indian government has kept a lid on the retail selling prices of auto fuels – petrol and diesel – unchanged since November 2021 as a populist measure given the impending assembly elections across five states.

Based on the existing value-added tax (VAT) structure and taking Brent crude price of $100 - $110 per barrel, SBI believes diesel and petrol prices should have been higher by Rs 9-14 each by now.

“If the Government, however, cuts the excise duty on petroleum products and prevents the prices of petrol and diesel from rising, then it will incur an excise duty loss of Rs 8,000 crore for a month. If we assume that the reduced excise duty continues in the next fiscal and assuming petrol and diesel consumption grows around 8-10 per cent in FY23, then the revenue loss of the Government would be around Rs 95,000 crore to Rs 1-trillion for FY23. In this context, the FY23 budget numbers that are pegged conservatively would act as a clear counter cyclical buffer for such revenue loss,” wrote Dr. Soumya Kanti Ghosh, group chief economic adviser State Bank of India in a recent report.

India’s retail inflation at 6.01 per cent in January (seven-month high) is already near the Reserve Bank of India’s (RBI’s) tolerance band. Retail inflation, data showed, had risen to a five-month high of 5.59 per cent in December, from 4.91 per cent in November, mainly due to an uptick in food prices. And the ongoing Russia – Ukraine crisis is likely to add fuel to the fire.

Russian/Ukrainian grains exports (wheat, barley, corn), according to estimates by Rabobank International, represent 24 per cent of the global total. The two also account for 50 per cent of sunflower products (seeds, meal and oil), and 21 per cent of rapeseed of the global total. Areas of Ukraine that could potentially see military disruption account for half its wheat. Sanctions, they said, would see an extraordinary impact given inelastic consumer demand.

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“CBOT Wheat rose 21 per cent in 2021 on an estimated 8.8 million metric tons (mmt) market deficit, and sanctions removing over six times that amount could see wheat prices double. The price surge would lead to expanded growing areas outside Russia/Ukraine, putting pressure on other crops, but still could not compensate for the structural deficit. By contrast, countries bypassing sanctions could buy discounted Russian/Ukrainian grains via back-channels, and/or act as a conduit to other markets. Again, we would have a sharply bifurcated global market,” cautions Michael Every, global strategist at Rabobank International.