Why oil can spoil India’s budget math
A spike in oil price to around $70 per barrel is enough to strain public finances and add 0.4% to the Centre’s fiscal deficit. Photo: Bloomberg
Mumbai: One of the biggest drivers of India’s superlative macro-economic performance in the recent past has been a relatively under-appreciated element: oil. Since 2014, the dramatic fall in crude oil prices has helped India contain her twin deficits, and tame inflation. But with oil exporting countries planning to curtail oil supply, raising the possibility of a rise in oil prices, the Indian economy might soon have to deal with another pain point besides demonetisation.
The extent of the gains from lower oil prices since mid-2014 is under-appreciated as the benefits have not been evident in the retail prices of petrol or diesel. However, the government did improve its finances, using the opportunity to increase the amount of taxes collected on petroleum products, as the charts below illustrate.
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