The Indian government may use the falling crude oil prices to further increase excise duty on petrol and diesel in the country to raise additional resources required for keep rising deficit under check and meet additional expenditure needs arising from coronavirus (COVID-19) outbreak. In addition, the COVID-19 will have an impact on the country's gross domestic product (GDP) through trade, hotels, transport, communication and services sub-segment and this will have pressures on fiscal deficit as a percentage of GDP, says a note from State Bank of India (SBI).
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of SBI, says, "Ideally, as per our estimates, a $1 dollar change in crude prices results in 50 paisa change in retail prices. Based on such trends, the fall in crude oil prices from $50 per barrel to less than $30 per barrel could potentially lower the petrol and diesel prices by Rs10 to Rs12 per litre from their present prices assuming excise had stayed at the previous level.
"However the rise in excise duty of Rs3 on petrol and diesel prices by Union government may lead to maximum cut of Rs4.25 on petrol and Rs3.75 on diesel from the current level. We, thus, expect the government may further limit such fall in retail prices and thereby increase the excise more."
Data on historical trend in Brent crude oil prices and its relationship with excise duty collection and retail prices, suggests post- goods and services tax (GST), excise duty on petro products now contributes 85%-90% of overall excise duty collection of Indian government.
During, the first nine months (April to December 2019) of FY19-20, total excise collection on petro products is close to Rs1.5 lakh crore. If the same run rate continues for FY19-20, then there could be shortfall of at least Rs14,000 crore, SBI says.
According to SBI, the COVID-19 outbreak is likely to impact India's fiscal numbers in FY19-20 though it might be too early to say, possibly in FY20-21. However, it says, it will be completely foolhardy to stick to any mandated fiscal rules in times of current crisis that is now threatening to rip apart the entire global financial ecosystem. Globally, state loans, income subsidies and tax deferrals are the most common fiscal packages being offered.
"Apart from fiscal measures, we believe that Indian government may think of unconventional fiscal measures like tax moratoriums, payment extensions on social charges, loan guarantees and wage subsidies for workers who cannot work or move to part time roles if COVID-19 in India reaches to third or fourth stages," Dr Ghosh from SBI says.
In India, the number of active cases have risen to 177 with 30 fresh cases in single day on 18 March 2020. "When we analyse the occurrence of active cases in seven most affected countries apart from China, in the second week, the number of cases jumps almost seven times compared to the first week. In some countries like Iran and Spain even the active cases rose to 13 times in the second week compared to the first week. Though India has already taken plethora of steps to prevent the spread of COVID-19, all eyes are now on the rise in active cases in the current week and next as this determines the extent of our preparedness," SBI added.
Meanwhile, based on current tax revenue trends, additional expenditure rationalisation of Rs1.2 lakh crore might be required in the current fiscal, if India has to stick to mandated 3.8% fiscal deficit.
SBI says, "In FY2021, nominal GDP growth is at 10% and every 10 basis points (bps) slippage in nominal GDP numbers in FY2021 will push up fiscal deficit by roughly one basis point. We are already estimating that the impact of a 5% inoperability shock could be 90bps on GDP from trade, hotel and transport and transport, storage and communication segment that could be spread over FY2020 and FY2021, with a larger impact in FY2021. The government has already announced an additional borrowing through short term papers in FY2020."
