A study undertaken by Acuité Ratings reveals that the
oil taxes in India are inversely proportional to the global oil prices with
past empirical data suggesting that the negative correlation goes up to an
extent of 80%. When the US nuclear deal with Iran in July 2015 led to a
dilution in sanctions and triggered a supply glut and sharp decline in oil
prices, the Government of India’s budgeted tax revenues from petroleum products
increased substantially. As per fiscal data, tax revenues from petroleum
including cess and additional duties climbed sharply from Rs. 0.32 Lakh Cr in
FY14 to Rs. 1.71 Lakh Cr estimated for FY20. While the price per barrel
averaged $103 in FY14, it is averaging around $60 in FY20.
Acuité believes that the sharply downward trajectory in global oil prices, with Brent Crude currently plummeting below $35 since the first week of March 2020 along with India’s ongoing fiscal compulsions is set to unfold a similar story. Says Sankar Chakraborti, CEO, Acuité Ratings & Research, "While the impact of the oil price decline may be negligible in FY20, it is likely to have a significant positive impact on the fiscal print in FY21. The revised or actual oil tax revenues are likely to be substantially higher than the budgeted figure of Rs. 1.82 Lakh Cr in the coming fiscal; we estimate that the additional revenues from the latter can be between Rs. 30,000 – 60,000 Cr. The actual windfall will however, depend on three factors which are (i) the sustainability of the global oil prices below $50 per barrel (ii) any decision of the government to pass on the cut in global prices substantially to the domestic retail prices which we believe is unlikely at this point and (iii) any unexpected depreciation in the rupee brought about by the risk-on environment in the global markets impacted by the virus scare. Adds Mr. Chakraborti "The windfall from additional oil tax revenues can offset the likely pressures on the fiscal deficit; with a moderate economic revival and a nominal GDP growth of 10%, the fiscal deficit figure for FY21 can be pared down by 20 bps.”
The underlying assumptions taken by Acuité for the fiscal windfall are that the average crude oil price for India’s purchase basket will remain below $50 for much of FY21 and average around $41, the level that had been seen in FY16. Further, our assessment is that the union budget for FY21 has projected the average crude cost per barrel to $61, similar to what has been the average levels in the whole of FY20. Subsequent to the removal of the US sanctions in FY16, the supplies from Iran had picked up and the global oil market witnessed an incremental supply of 1.5-2.0 million barrels per day. It is likely that the current breakdown in talks and the lack of consensus between Saudi led OPEC and Russia will lead to a similar addition to the global supply. However, the global economy is in a weaker shape vis-à-vis FY16 and therefore, the impact on prices can be even more severe along with higher volatility.
Notwithstanding these headwinds for the oil industry, the prices may stabilize sooner than expected with agreements on production cuts since such low prices below $40 are not sustainable for the key oil producing nations from a fiscal perspective. However, there is a strong possibility that the prices will remain below the mean threshold of $50 per barrel as that is the reported point of viability for another significant alternative to the traditional oil sources i.e. the American Shale Gas industry, which is likely to be the primary target for the additional supply.
From the domestic stand point, India’s daily petroleum product consumption for FY20 (YTD) has averaged 4.3 million barrels (equivalent), just 0.6% higher than what the country consumed in the previous year. We reckon that the consumption levels will remain largely at the same levels i.e. around 4.32 million barrels in FY21. This will additionally absorb exchange rate pressures that are triggered by increasing import volumes. We expect that any moderate slide in the rupee dollar exchange rate in the current context will not significantly offset the expected gains on the oil import bill. In FY20, India is expected to import 16% less crude (which includes crude intended for refinery exports) by volume and 24% by value, a trend that may somewhat compensate for the depreciation of the rupee in FY21 as well.
Table1: Oil Import Data
Financial Year |
Daily Consumption
Petroleum Products
(Equivalent)
|
Crude Oil Price/ Barrel
(US $)
|
Related GOI Taxes
(Lakh Cr INR)
|
FY14
|
3.18 |
103 |
0.32 |
FY15 |
3.32 |
78 |
0.55 |
FY16 |
3.70 |
41 |
1.02 |
FY17 |
3.90 |
44 |
1.04 |
FY18 |
4.14 |
53 |
1.24 |
FY19 |
4.28 |
67 |
1.59 |
FY20 |
4.30 |
61 |
1.71 |
FY21 |
4.32 |
41# |
1.82 (2.42#) |
Source: PPAC, CMIE, Acuité Research
#Acuité Estimate