What if there is a cruel crude shock?

India Infoline News Service | Mumbai |

Crude in Rupee terms has again reached an all time high. This will force the government’s hand because rising crude has an impact on domestic inflation and current account deficit as we import most of our crude requirements. In my opinion, in the coming days we will see a steep increase in petrol and diesel prices. I pray and hope, we don’t have a situation that bad remains behind and worse begins.

I have to be cruel to be kind - Hamlet.


The Hon Finance Minister has done a good job of walking the tightrope.  Given the circumstances, be it on the economic or political front, he has tried his best to revive the investment cycle, including viability gap financing for select sectors, or issuance of tax free bonds or removal of withholding tax. The set target of over 8000 km of highways is also a big positive. Increase in excise and service tax was on expected lines. The feel good sections of the budget were the widening of personal income tax slabs, increased spend on agriculture and supply chain, reduction in Securities Transaction Tax, although only for delivery  without introduction of Commodities Transaction Tax, and partly addressing financing issues faced by infrastructure sector. Direct transfer of subsidies like LPG and Kerosene can significantly reduce leakages when rolled out all over India.  Keeping corporate tax rates unchanged and removal of cascading effect of dividend distribution tax in a multi tier corporate structure are pleasant surprises.
 
Introduction of Rajiv Gandhi scheme for retail equity investors shows that the Government has woken up to the need to channelize savings into productive assets. This will improve retail participation in equities over the long term. Rise in customs duty on gold is also a step in same direction. Hopefully, outside of the budget, the Parliament will get to work and pass the many bills that are pending to change the mood, especially DTC and GST.
 
Subsidies, which are estimated to decline 12% appear to be understated like last year. One explanation can be a petrol and diesel price hike in coming days.
 
Crude in Rupee terms has again reached all time high. This will force the government’s hand because rising crude has an impact on domestic inflation and current account deficit as we import most of our crude requirements.
 
In my opinion, in the coming days we will see a steep increase in petrol and diesel prices. There is no logic of subsidizing diesel because it is used for revving up diesel SUVs. However much the auto sector lobby tries, diesel prices are set to move northwards. As discussed above, kerosene and LPG subsidies will be tackled using direct transfers. Only this way, the government can handle the economy threatening graph.
 
With government borrowing and inflation on the rise, RBI’s ability to cut rates is limited in the short term. If the rate cut does not happen soon, GDP growth estimates will be adversely affected and that can really spoil the FM’s party. RBI’s ability to effect a rate cut depends to some extent on what crude does. If we have a crude shock, then FM will be both cruel and unkind. That is the biggest risk at this moment.
 
To end this piece, let me again quote from Shakespeare’s play the lines that follow the Hon FM quote from Hamlet, which was reproduced in the beginning - Thus bad begins and worse remains behind. – Hamlet.
 
I pray and hope, we don’t have a situation that bad remains behind and worse begins.
 

 

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