Budget 2022 | Russia-Ukraine Conflict: The ongoing contention between Russia and Ukraine can lead to a surge in oil prices in India. The conflict has already resulted in a hike in global oil prices with Brent breaching the $90-a-barrel mark overnight on Thursday. The Budget 2022 is going to be announced on Monday and the hike in oil prices is posing a major challenge for the central and state governments.
Some analysts predict oil prices to hit the $100-110-mark per barrel in the coming days due to supply disruptions and rising demand support prices.
Rates have surged sharply from a low of $65.88 on December 2, 2021. if the prices continue to rise, it will put a lot of pressure on both the Central and state governments to review taxes.
The Covid-19 cases and spread of Omicron have also impacted the Crude oil prices rising sharply since the beginning of the year. Major oil-producing countries have also kept increasing crude oil supplies despite rising demand. OPEC+ had agreed to sharp cuts in supply in 2020 owing to Covid-induced travel restrictions, but the organisation has been slow to boost production since then.
The Budget 2022 has assumed that oil prices will hover around the $65-per-barrel mark. Between April and September, oil prices traded largely in the range of $60-75 per barrel. In October, it rose to $86 per barrel, before sliding down to $65.86 per barrel again. Prices have steadily risen since then to touch a post-Covid all-time high of $90.5
However, on the positive side, government revenues on taxes of oil and related products have also been rising over the last two years. The country’s retail inflation, which is measured by the Consumer Price Index, has already risen to a five-month high of 5.59 per cent in December. Wholesale price index-based inflation rose to 13.56 per cent during the same month.
High inflation will force the government to cut taxes on oil and related products, especially since rising prices are a key factor ahead of upcoming Assembly elections in five states.
“Oil prices are a big factor in the Budget that will be presented next week and the overall fiscal math of India as it imports more than 85 per cent of its crude requirements. The oil import bill is already up by more than 70 per cent from last year and it affects the balance of payments adversely. Oil marketing companies haven’t increased retail prices for the last 80 days due to the upcoming polls and given the under-recovery that is already built-in, the Union Finance Minister may not have the headroom to increase excise duty. She should rather build in a provision for a cut in case the oil prices hit the three-digit mark,” Debasish Mishra, a partner at Deloitte India, told media.