Prices of Brent crude oil rose 18% in 2017 to $67.02 per barrel in December, a 30-month high. Higher oil prices are likely to widen the fiscal and current account deficits.
India imports more than 70% of its oil requirement and every $10 per barrel change in oil price adds 0.4% of gross domestic product (GDP) to the current account deficit, according to Nomura. The Economic Survey in January had said rising oil prices were a challenge to India’s growth, projecting the economy to grow in the range of 6.75-7.50% in 2017-18.
Oil prices were at $110 per barrel in 2012. It dropped to $40 in 2016. It is now nudging $60 and many analysts believe that it will keep on this trendline and could be around $80 later this year. It will then create a set of problems for the regime. it will either have to increase domestic retail prices if it wants to keep oil tax revenues at their present level. Otherwise it can absorb the oil price increase but cutting down expenditures and subsidies. Finally it could borrow more from the market and stoke inflation. This is going to be a real bad triple whammy.
We are increasingly becoming dependent on oil tax revenues. in 2013-14, the earnings from indirect taxes on the petroleum products stood at Rs 104,163 crore, which rose to 122,926 in FY15 and went up to Rs 203,825 lakh crore in 2015-16.
In other words, government earnings from petroleum products increased three times over a period of five years, primarily on account of increase in indirect taxes from time to time.