Low Crude Prices Can't Gloss Over the Real State of Economy for Long

Over last one year all commodities are in free fall and crude oil is no exception to this. While other commodity prices are down due largely to market forces, in case of crude oil geo-politics – the turmoil in Middle-East and the Western attempt to corner Russia, among other things – has also played a significant part. Factors like recession and slowdown in major economies and technological shifts are also contributing to the fall in crude oil prices. In turn lower revenue from oil is forcing countries heavily dependent upon oil revenues to cut down their expenditure and/or raise taxes. The fall-out of this on respective countries will be visible sooner or later.

Structurally the market is in over-supply position due to factors like shale oil discoveries, muted growth in major economies, closing gap by alternate energy sources and technological advancement like electrical cars.

For India, which is the fourth largest importer of crude oil, the spell of low crude prices has come as a boon. As per estimates of Ministry of Petroleum & Natural Gas, India will import 188.23 million tonne (mt) of crude oil in FY16 at a cost of Rs 4,72,932 crore, compared to 189.43 mt crude worth Rs 6,87,416 crore imported in FY15, saving Rs 2,14,484 crore on fuel bill. In dollar terms the value of India’s oil imports would stand at $65 bn in 2015-16, compared to $113 bn in FY15. The calculation is based on estimated average crude oil price of $55 a barrel for the rest of the financial year, till March 2016. However, the prices have come down to $30 a barrel in international market.

Since April 2014, the global oil price benchmark Brent crude has fallen by 60 per cent, from $110 a barrel to less than $40 a barrel. However, domestic petrol prices have come down by only 17 percent, to Rs 60 a litre. Similarly, the retail price of diesel has come down by 21 per cent from Rs 57 a litre in June 2014 to Rs 46 a litre. The main reason why the drop in petrol and diesel prices has not kept pace with the crash in global crude prices is the seven excise duty hikes since November 2014 to increase revenue collection. The overall excise duty increase is 108% on petrol price and over 200% on diesel since the new government came to power in May 2014.

The duty on petrol has risen from Rs 9.48 per litre to Rs 19.73 per litre. Similarly the excise duty on diesel has gone up from Rs 3.65 per litre to Rs 12.98 per litre at present. There could be further increase in excise of Petrol and Diesel. Excise collection this November 2015, was 1,70,693 crore, or 67.1% higher than in the corresponding period in 2014. 78% of this has come from the oil sector. This has raised indirect tax growth in 34.3%. It should also be noted that while diesel prices have gone down the world over and to an extent also in India, railway passenger fare and freight rates have been subjected to frequent upward revision during the nearly two years of Modi government.

Taken together the lower import bill and higher excise earning has benefited the exchequer by Rs 5 lakh crore. This bonanza has helped to hide complete failure of Government in macro- economic management. The economy is in fact sinking - exports have been declining, domestic demand remains low and private sector investments are 30% lower than last year. Index of Industrial Production is under 4%, manufacturing alone is below 3%. Sales of manufacturing companies has fallen 12%. Bank NPAs have blown up and a write off with public money is on the cards. And infrastructure is at a stand-still. Rural distress is at its peak. RBI itself is questioning the GDP growth figures.

By all indications, the run of good luck on the oil front is not going to last long and there is no way the government can gloss over the real state of the economy. The economic front is fast turning out to be a critical challenge before the government and the government is trying to hide this failure by bringing the RSS agenda to the fore, marking a growing all-out assault on democracy and creating a serious crisis of governance. As the democratic movement in the country confronts the assault on democracy, the struggle on the economic front will also have to intensify and the government must be exposed and challenged on issues of management of key natural resources and the banking sector.

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