Rising oil prices will pose the biggest challenge to the finance minister Arun Jaitley in next fiscal. According to the Economic Survey, crude oil prices may rise by up to 12% in the next fiscal.
Oil has so far been lucky for the Modi government. When NDA formed the government, in 2014, petroleum prices were $108 per barrel. It declined to an annual average of USD 46 per barrel in 2015-16 and 2016-17.
It was an unexpected windfall for the government. Oil prices are directly linked to the prices in the international market. This means that when the crude prices in international market declined, petrol prices for consumers should have declined.
However, the government increased excise duty on petrol and diesel nine times between November, 2014 and January, 2016. As a result, its revenue increased from Rs 99,000 crore in 2014-15 to Rs 2,42,000 crore in 2016-17.
This windfall of Rs 1,43,000 crore helped the government in managing fiscal deficit target of the government. However, crude prices have started increasing for last five months. It is around $ 70 per barrel. In Delhi, petrol prices are about Rs 72 per litre.
Being an election year, it is clear that the government will have to reduce excise duty if crude oil prices rise further. This will have direct impact on government revenue.
The central government levies Rs 19.48 per litre excise duty on petrol and Rs 15.33 on diesel. VAT on petrol in Delhi is Rs 15.39 per litre while on diesel it is Rs 9.32.
It may be noted that cut in excise duty on petrol in October, last year, would cost the government Rs 26,000 crore in terms of annual revenue (for the year ending 2018).
Economic Survey says: “It is estimated that a $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points, increases WPI inflation by about 1.7 percentage points and worsens the current account deficit by about $9-10 billion dollars.”
Any decline in crude oil prices will make financial management difficult for the government.