Surging Crude Prices Could Cost Govt Up To Rs 1 Lakh Crores: SBI Report

Surging crude prices could cause deep revenue losses to the government, should it decide to cut excise on petrol and diesel and if crude stays near the $100 a barrel mark.

"The average price of Indian basket of crude oil has risen to $84.67/bbl. in Jan'22 from $63.4/bbl. in Apr'21, 33.5% increase. If crude oil price rises to an average of $100/bbl. from the current average, inflation is likely to increase by 52-65 bps. Interestingly, petrol and diesel prices have not changed since Nov'21. Based on the existing VAT structure and taking Brent crude price of $100/bbl.-$110 bbl., diesel and petrol prices should have been higher by Rs 9-14 each as of now. If the Government however reduces the excise duty on petroleum products and prevent the prices of petrol and diesel from rising, then the Government will incur excise duty loss of Rs 8000 crore for a month. And if we assume that the reduced excise duty continues in the next fiscal and assuming petrol and diesel consumption grow around 8-10% in FY23, then the revenue loss of the Government would be around Rs 95,000 crore to Rs 1 lakh crore for FY23," SBI has said in its latest report.

"In this context, the FY23 budget numbers that are pegged conservatively would act as a clear counter cyclical buffer for such revenue loss," the report states.

The SBI report also believes that there remains an upside risks to inflation, even though it is high time that the methodology of computing CPI inflation by using the Consumption Expenditure Survey/ CES, last updated in FY12 may be updated.

"This is a major issue as using CES survey to compute inflation might be introducing an upward bias in CPI estimates as food has a weightage of 45.86% in headline CPI, that is misleading. For example, In Indian context PFCE data as released by National Account Statistics (NAS) for the year ended Mar'21 reveal that the share of food consumption was at 32.5% in FY21.The NAS and CES estimates have difference in coverage, estimation methods and databases, and, therefore, the inflation derived from weights under both the methodology, would be different. However, some of the policy decisions taken by the Government during the pandemic should have resulted in much lower CPI, but that was not to be, given the methodology of computing CPI through CES survey," the report adds.