SBI report: Expensive oil could hit government with up to Rs 1 lakh crore in lost revenue
There are worrying signs on the price front and on the government fiscal side if crude oil prices remain at the current high level triggered by the Russian invasion of Ukraine.
If the price of crude oil increases by an average of $100 (or $90 per barrel) from the current average of $74 per barrel, inflation is expected to increase by 52 to 65 basis points (32 to 40 basis points ), according to a State Bank research report. of India (SBI). In addition, the government could face a revenue loss of Rs 95,000 crore to Rs one lakh crore due to rising oil prices, according to the SBI report. “However, we are hoping for a significant trend correction in oil prices,” he said.
The average Indian basket price of crude oil rose to $84.67 per barrel in January 2022 from $63.4 in April 2021, an increase of 33.5%.
According to SBI calculations, every $10 a barrel increase in the price of Brent will cause inflation to rise by 20 to 25 basis points.
Interestingly, gasoline and diesel prices have not changed since November 2021. Based on the existing VAT structure and taking the price of Brent crude from $100 to $110, the prices of diesel and petrol should have been higher by 9-14 rupees each from now on. If the government, however, reduces excise duty on petroleum products and prevents petrol and diesel prices from rising, the government will suffer a loss of excise duty of Rs 8,000 crore for a month, according to the report. of the SBI.
“If we assume that reduced excise duties continue in the next fiscal year and gasoline and diesel consumption increases by about 8-10% in fiscal year 23, the loss of government revenue would be around Rs 95,000 crore to Rs 1 lakh crore for FY23,” it said.
Against this backdrop, FY23 budget numbers that are conservatively indexed would act as a clear counter-cyclical buffer for such lost revenue, SBI said.
The inflation scenario changes if the prices of crude oil, food, services and housing remain at high levels. Given this, there appears to be an 87 to 100 basis point upside risk to the RBI’s 4.5% inflation for FY23 if the price of oil averages $90 per year. barrel and 107 to 127 basis points if the price of oil averages $100, the report mentioned.
The SBI said historical trends (since 2018) indicate that it takes roughly 18 months for crude prices to collapse 67% from the high and a 30% decline from the the highest level can even occur in less than 3 months. Thus, the decline in crude prices from the current high levels could be even faster according to recent trends and this bodes positive for the overall macro prognosis, according to the report.
Retail inflation rose again to 6.01% in January 2022. The RBI expects inflation to stand at around 4.7% in March 2022. For FY23 , the RBI expects CPI inflation to be around 4.5%. “However, we believe there are upside risks to inflation due to a multiplicity of factors, including soaring crude oil prices,” he said.
Other commodities that will see inflation include precious metals, gold, palladium and platinum, according to the report. As Ukraine is a major exporter of agricultural products, there will be an impact on wheat and corn prices if shipping lines in the Black Sea are disrupted.