NEW DELHI: The meltdown in oil costs permits the federal government to shore up its funds by elevating excise duty to partially take in the windfall good points being made by fuel retailers and provides aid to shoppers by saying a reasonable discount in petrol and diesel costs to tame inflation, BofA Securities, the funding banking division of the US banking large earlier often known as Bank of America, stated in its newest report.
“A fall in oil prices, and the subsequent reduction in import costs can be construed as India’s savings going up, as it pays less for its energy requirements. However, the savings may not necessarily be accrued by households or corporates (by way of lower energy bills), and it is the government which can decide whether to pass on the gains, and how much to pass on, through lower prices, creating a trade-off between fiscal revenues and inflation,” the report by Rahul Bajoria stated.
In rupee phrases, the report estimated crude costs declining slightly below Rs 9/litre between September (2023) and March 2024. It stated oil costs have fallen 20% for the reason that final fuel price revision in April, resulting in widening (advertising) margins for fuel retailers the federal government can faucet into.
“The government can look at a gain of almost Rs 110 billion in revenue/profits annually for the additional rupee oil companies make on petroleum products, thus making the gains potentially be close to Rs 1 trillion on an annualised basis, or 0.3% of GDP, if these numbers hold for another year or so,” the report stated. This gives the federal government room to recoup income it had foregone by lowering excise duty on petrol and diesel within the final two years to cushion shoppers from flaring vitality costs.
If the federal government chooses to not take in the financial savings, and cross it on to shoppers, it can have an instantaneous affect on inflation and consumption over an extended interval. On inflation, petrol has a weight of two.19% within the CPI, whereas diesel, which is generally used for industrial functions, has a weight of solely 0.15%. “Together, a Rs 5 /litre reduction in retail fuel costs would imply a 5.5% reduction in fuel index, which will generate a 14 bp direct impact, and another 14-15 bp of indirect effect over a period of 2-4 months, bringing the total impact closer to 29 bp,” the report stated.
Noting India meets 80% of oil requirement by imports, the report estimated the 20% decline in crude costs would lead to financial savings of virtually $13 billion for each $10/barrel decline yearly. “This translates into about 0.3% of GDP on the current account, which further boosts external finances, it said and pointed out the “RBI has accrued about $67 billion of extra international reserves in 2024 itself”.
Benchmark Brent crude dropped to $70/barrel earlier this month, the bottom since December 2021, and is hovering slightly below the $75/barrel, down 20% from a peak of $92 in April. The report identified that rising volumes of Russian crude at reductions, although slim at present costs, enhanced the financial savings on vitality imports.
