Lower oil prices to offer relief to consumers, government
NEW DELHI: Tuesday’s fall in Brent to under $80 a barrel for the first time in three months will allow oil companies to hold pump
NEW DELHI: Tuesday’s fall in Brent to under $80 a barrel for the first time in three months will allow oil companies to hold pump prices at current levels, while helping govt finances and keeping inflation from rising, provided gains on crude hold.Policymakers are cautious while making any projections, given how the peace talks between the US and Iran have moved, but the markets seem to be more upbeat. Stocks of oil marketing companies have rallied in the last two days, apart from softening of global prices.“It seems to be a relief rally and if prices can be sustained will depend on demand and supply. Oil marketing companies are still losing money and govt has given a substantial relief through excise cut.
If oil prices come down and stay at a lower level for some time, then the benefit of softening prices can be transmitted to consumers,” said DK Joshi, chief economist at Crisil.While Brent had dropped to $83 a barrel on Monday, the cost for Indian refiners was estimated at $82.84, indicating that the gap had narrowed. But the cost for consumers is not a function of crude but linked to the international price of petrol and diesel, and in June they were higher by 22% and 43%, respectively.“The recent de-escalation in the conflict and moderation in oil prices bodes well for both inflation and growth outlook for India.
With every $10 increase in oil, inflation tends to rise by 20-30bps and growth drag is 20bps. While the impact of disruptions may linger in the system for some time, the eventual move of oil prices towards $70 pbl over the coming months could help bring stability for rupee as well as reduce rising fiscal pressures due to higher subsidy costs for govt,” said Sakshi Gupta, principal economist, HDFC Bank.The easing of tension and lower prices of oil and fertiliser are going to offer significant relief to govt as a massive spike in subsidy bill is expected, with the Centre under pressure to double support for soil nutrient and bear the burden of losses on sale of subsidised gas cylinders.
With oil marketing companies losing around Rs 700 crore daily on fuel and cooking gas, their contribution by way of direct tax will be zero.“The fertiliser subsidy will overshoot but not double as was being suggested. The LPG subsidy will increase, but there will be no fresh price hikes by oil companies, provided the peace deal works out. We expect the fiscal deficit to be higher than what was budgeted,” said Madan Sabnavis, chief economist at Bank of Baroda.
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