How Modi govt’s budget could be affected by US air strikes to kill Iranian general

Oil prices rose close to $70 a barrel in international markets after US air strikes killed Qassem Soleimani, an Iranian general.

File image of Finance Minister Nirmala Sitharaman | Photo: PTI

New Delhi: Rising global crude oil prices in the aftermath of the US air strikes in Baghdad could increase the headache for Finance Minister Nirmala Sitharaman ahead of the Union Budget to be presented next month.

Oil prices rose close to $70 a barrel in international markets after US air strikes Friday killed Qassem Soleimani, an Iranian general heading the Quds Force, raising concerns about a possible retaliation from Iran and escalation of tensions in West Asia.

Crude prices were trading around $68 per barrel — levels last seen in September 2019 after attacks on Saudi Aramco’s oil infrastructure disrupted production and supplies.

India imports nearly 80 per cent of its crude oil requirements and any increase in global crude prices will widen the trade and current account deficit and put pressure on the government to lower excise duties to reduce retail oil prices. This could further exert pressure on the deteriorating fiscal deficit, economists and analysts said.

India budgeted a fiscal deficit of 3.3 per cent for 2019-20 but runs the risk of overshooting it on account of slowing tax revenues and failure to meet disinvestment targets.

Rising retail oil prices could also further increase inflationary pressures in the Indian economy. Retail inflation based on the consumer price index is expected to inch up to 7 per cent in December on account of higher food inflation — levels last seen in August 2014.

At present, the government levies an excise duty of nearly Rs 20-21 on petrol and around Rs 16 on diesel. The retail price in Delhi is around Rs 75 for petrol and Rs 68 for diesel.

A September 2019 Care rating report estimates that the government collected nearly Rs 3 lakh crore in taxes and duties from the petroleum sector of which around Rs 2.15 lakh crore was on account of excise duty.

A possible flight of foreign institutional investors (FII) looking to invest in safe havens could impact the rupee. The rupee depreciated by around 40 paise against the dollar in morning trade and was trading around 71.7 to a dollar Friday after ending the day at 71.3 Thursday.

An increase in oil prices will also push up inflation and this could adversely impact government borrowing costs on account of higher bond yields.

‘Bad news’

Ajay Bodke, CEO, portfolio management services at Prabhudas Lilladher, said a possible Iran retaliation could disrupt oil supplies.

“Oil is likely to be on boil. This is bad news for large oil importing countries, especially those with a large trade and current account deficit like India,” he said.

Bodke added that the stock markets could see an increase in risk aversion and there could be a pressure on emerging market currencies as investors choose safe haven investments like gold. He also said that any FII outflows could see a rise in bond yields.

Devendra Pant, chief economist at India Ratings and Research said a further deterioration in the fiscal arithmetic will depend on how much of the fuel price increases are passed on to the consumers and how much is absorbed by the government through excise cuts and by oil marketing companies through lower margins.

“Domestic fuel prices will depend on the extent of the global price increase as well as the movement of the rupee. One has to see the extent to which the levels the retail fuel prices are allowed to rise given that it feeds into inflation leading to a classical monetary policy response,” he said.