The crisis on the oil front is unmistakably serious but there are redeeming features which make it look less serious than it did in 1991 when foreign exchange reserves were sufficient for only a few weeks’ imports and in 2008 in the wake of the Lehman Brothers’ collapse and the global financial crisis.
With crude oil prices hitting the roof, the country’s current account deficit (CAD) is in trouble. Oil imports being a major constituent of India’s import bill, the rupee has hit fresh lows in September as the crude prices soared. Though a falling rupee is per se good for export competitiveness, there is indeed more to a falling rupee value than just that. Prime Minister Modi, in the series of meetings he held recently with his economic advisers and finance ministry officials to brainstorm on ways to tackle the oil crisis focussed on “strengthening the macro-economic fundamentals” and to remain firm in the path of fiscal consolidation through revenue buoyancy strategies.
What has made matters worse for the Modi regime is the fact that the oil prices are hitting the country harder with nearly half the price of Rs 80-90 a litre for petrol and diesel being on account of central and state taxes. Had it not been for oil prices being used to subsidise various social welfare schemes of the governments both at the Centre and in states, the price could have been slashed without much ado.
The government’s manoeuvrability on mopping up resources through other means is restricted by having to cater to powerful lobbies in an election year. Agriculture is a holy cow with successive regimes having given up on the idea of taxing agricultural income due to the political consequences of such action. The farmer today is an entity that is acutely conscious of his rights and is not ready to give in on anything easily. Considering the bad blood between the ruling combine and the Opposition, the latter wastes no opportunity to make tall promises of an El Dorado if it comes to power.
The Government at the PM’s meeting considered the option of reducing taxes on petroleum products or of asking oil companies to offer discounts. But if they were to resort to the second option, the conscious decision of the Modi government to enable oil companies to clean up their books by giving them pricing freedom would come to nought. A back-of-the-book calculation suggests a Re 1 reduction in excise duty would mean reduced collections of Rs 13,000 crore, by no means a small amount. The Modi government is also fearful of the fiscal deficit going out of hand because of its deleterious effect on inflation and is keen to eschew any measures that would raise the deficit to alarming levels with its concomitant effect on prices.
“External factors” — like US Federal Reserve’s tightening of monetary policy, protectionist spree and the US trade war, have worsened the problem for India. The rupee being the worst performing currency in Asia this year, down more than 5 per cent against the dollar, is not helping either. Although oil prices have been moving up since last year, the latest trigger for the sudden spurt in May was US president Donald Trump’s withdrawal from the Iran nuclear deal earlier that month. Trump has done some good to the US economy with short-term gains but his protectionist policies have hurt other countries hard. His sanctions against Iran and forcing other countries not to deal with that country have robbed the US of goodwill all across the world.
When Iran, the third-largest producer in the Organisation of the Petroleum Exporting Countries (Opec) producing 2.5 million barrels of oil a day, pledged to limit its nuclear ambitions to civil energy production under the 2015 deal under Barack Obama, sanctions were lifted on oil exports, which boosted oil supplies and lowered prices. The process has been reversed again thanks to Trump’s intransigence. Prime Minister Modi’s new shale gas strategy outlined last month taking a cue from the US has provided that by end-2013, shale gas exploration bids in six Indian regions (Cambay, Assam-Arakan, Gondawana, KG onshore, Cauvery onshore and Indo-Gangetic basins) could reveal long-term potential.
Despite environmental concerns over deep-rock fracking and the cost of technology, shale gas is already boosting America’s domestic energy production and reducing its historical reliance on oil imports. According to Union Finance Minister Arun Jaitley, important decisions have been taken to address the issue of the current account deficit, which has touched 2.4 per cent of GDP in the June quarter. Mandatory hedging conditions for infrastructure loans through the external commercial borrowing (ECB) route will be reviewed and a 20 per cent exposure limit on investments by foreign portfolio investors in debt to a single corporate group will be removed.
Government will permit the manufacturing sector to access ECBs up to $50 million with residual maturity of one year instead of three years. ‘Masala’ bonds (masala bonds are bonds issued outside India but denominated in Indian rupees, rather than the local foreign currency) will be exempted from withholding tax this financial year and Indian banks will be allowed to become market makers in ‘masala’ bonds, including by underwriting.
There can be little doubt that the NDA’s prospects in the 2019 Lok Sabha elections would be grievously hit if timely steps are not taken to stem the tide and reduce the prices of petroleum prices. The Modi government will have to shed its seeming complacency and measure up to the challenge. Whether it reduces excise duties or brings petroleum products under the purview of GST or resorts to other measures, there is indeed no escape from pruning petroleum product prices to get a favourable verdict from the electorate.
Kamlendra Kanwar is a political commentator and columnist. He has authored four books.