Wednesday, May 29, 2024
India News

Will a West Asia conflict ruin the interim budget math?

New Delhi: Costlier commodities, higher inflation, and swelling fertilizer subsidies: the Indian economy looks poised to enter a period of fresh uncertainty, after tensions in West Asia flared up over the weekend. While an escalation in energy prices may disrupt calculations in the interim budget, potential supply chain snags may force the government to take trade policy actions, analysts said.

While costlier crude oil broadly spells ill for India, it also paves the way for higher windfall tax collections. Prices of crude oil and natural gas which are used to make urea move in tandem, although specific demand and supply conditions can influence prices of the two commodities. India provides significant amount of subsidy for fertilizers to protect farmer prices, and is also heavily dependent on imports for phosphatic and potassic fertilizers, which raises the exchequer’s vulnerability to a surge in global prices.

Oil prices have already touched $90 a barrel and a further escalation may push it above $100, Moody’s Analytics said on Monday. India, being a net importer of crude oil and about 85% of its energy requirement being imported, any increase in the oil prices raises its import bill. According to Moody’s Analytics, oil prices may add another $5 per barrel taking the prices up to $95 per barrel. The average price of the Indian basket so was $84.49 in March. “Now that the attack has happened, we expect oil prices to add another $5 per barrel to the risk premium, pushing oil to the $90 to $95 per barrel range,” it said.

The Indian economy is expected to have expanded by at least 7.6% in FY24, and policy makers have been hoping for a normal monsoon and less uncertainty on the external front to continue the growth momentum in FY25. In the interim budget for FY25 presented in February, finance minister Nirmala Sitharaman had set aside 1.64 trillion for fertilizer subsidies, 13% lower than the revised estimates for FY24. Sitharaman had also estimated 5% higher excise duty collection from the petroleum sector in FY25 at 3.18 trillion. During the fiscal year, Centre’s excise duty receipts had declined by 4.8% annually to 3.04 trillion. The budget had also projected a 10.5% nominal GDP growth in FY25 to 327.7 trillion.

Experts said rising geopolitical tensions can have a bearing on investments and growth prospects. “Any disruption in the supply chain posing inflationary pressures could have some impact on India’s economic growth rate, as it will influence the policy rate setting decisions of the RBI. There could be some constraint to growth in that regard depending on how the situation pans out,” said Suranjali Tandon, Associate Professor at National Institute of Public Finance and Policy (NIPFP). Also, supply chain shocks could spark a trade policy response from India to make ensure there is adequate supply in the domestic market, said Tandon.

India has taken the approach in the recent past of banning and putting restrictions on select farm produce to ensure domestic availability. India had also lowered import duty on edible oils in the recent past to cool domestic prices. However, a surge in global oil prices could potentially add to excise duty collection and windfall profit tax, said Tandon.

An expanding conflict in West Asia is a cause of concern for crude oil and natural prices, said Prashant Vasisht, senior vice president and co-group head, corporate ratings at ICRA. “About 20 million barrels per day of crude oil and condensate equivalent to about a fifth of the global consumption pass through the Strait of Hormuz of which about 70% comes to Asia.” The Strait of Hormuz is a narrow waterway between the Persian Gulf and the Gulf of Oman, linking West Asia and the Indian Ocean and is a key maritime route for trade that is vital for India’s energy security.

“Besides crude oil, Qatar ships its LNG through the Strait of Hormuz accounting for a fifth of the global consumption. Accordingly, Strait of Hormuz is the world’s busiest energy channel and any closure of the same may lead to surge in the prices of both oil and natural gas/LNG,” he said. Vasisht also said any surge in the prices of crude oil and natural gas would be detrimental for India as it relies on imports to the extent of 88% of its crude oil consumption and 45% of its natural gas consumption.

 

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