Higher crude prices, weak rupee may widen CAD by up to $31.2 bn: India Ratings

India Ratings and Research has estimated that the combination of boiling crude and weak rupee may widen the current account deficit (CAD) by up to $31.20 billion. Similarly, a research report by YES Bank estimated CAD to go up to 2.6 per cent of GDP (gross domestic product).

Interestingly, both the reports have different estimate of average oil prices. India Ratings’ estimate is $70 but YES Bank’s estimate is $75. Accordingly, Indian basket of International crude prices could be in the range of $68 to $73.

According to India Ratings, “If crude prices remain elevated during FY19 (2018-19), it will result in the widening of trade deficit/current account deficit by $22.23 billion to $31.20 billion. In Ind-Ra’s base case scenario, Brent crude averaging $70/bbl in FY19 will translate into Indian crude oil basket averaging $68.00/bbl. If the rupee averages 66.6/USD in FY19, net addition to current account deficit would be $22.23 billion. However, if the Indian crude oil basket averages $72.86/bbl (this means Brent crude averaging $75/bbl) and rupee averages 68.0/USD, net addition to current account deficit would be $31.20 billion.”

If India Ratings’ estimate came out true, then CAD for current fiscal is estimated to between $62-$71 billion.

YES Bank, in its report, expects crude oil prices to average at $75/barrel in FY19. This is higher than the previous estimate of $65/barrel on the back of tighter supply conditions.

Along-with weaker rupee, this is expected to take the current account deficit to 2.6 per cent of GDP as against the previous estimate of 1.9 per cent of GDP. CAD is excess of country's imports of goods and services over its exports.

These reports have come at a time when crude prices have started coming down. After touching $80 a barrel, Brent crude dipped to $75.30 and is now hovering between $76 and $77.

There is no clear cut opinion on prices to move in which direction, but it is believed that any significant geo-political development might push the prices up.

Who can provide relief to consumers?

Now, the big question is there any room available for reduction in retail prices of petrol and diesel. India Ratings says that states have more headroom to provide relief on domestic oil prices.

The value-added tax imposed by the states is on ad valorem basis. Therefore, with a rise in oil prices, state governments garner higher revenue from the sale of same quantity of oil as opposed to the Central Government whose excise duty is fixed in terms of INR/litre.

“A surge in crude oil prices, therefore, gives the state governments more headroom to rationalise the tax rate without compromising much on their fiscal arithmetic,” it said.

Elaborating with an example of retail sales price of petrol in Delhi, India Ratings said that the central excise was Rs 21.50 and VAT was Rs 12.70 on April 1, 2016. Exactly a year later, there was no change in excise duty; still VAT went up to Rs 14.10 paise on account of higher crude prices.

Similarly, on May 31, excise duty came down to Rs 19.50, but VAT again went up and touched Rs 16.70 again on account of higher crude prices. It means states have additional earning, over and above budget estimate, of Rs 2.57 per litre on petrol. This, as India Ratings believes, can be passed on to the consumer easily.