Budget 2019: Oil Prices to Modi’s Rescue Again?
The first woman Finance Minister of India Ms Nirmala Sitharaman presented her maiden budget in Modi 2.0 regime on 5 July. Amid challenges of slowing growth, tepid investment, decelerating consumption and weak global cues, the finance minister had her task cut out. Growth needed an injection while fiscal discipline had to be maintained. What compounded matters for Sitharaman was the fact that revenue collections (GST/Income tax) fell short of even the revised estimates in the interim budget presented this February 2019.
As per an analysis by Vivek Kaul for Mint, central good and services tax (GST) fell short of the original target by 24 percent. Income tax collections which were projected to be Rs 5.29 lakh crore, finally ended up at a much lower Rs 4.67 lakh crore. The Union excise duty collections were also slightly lower than originally hoped for. The fiscal deficit target for 2018-19 was essentially managed through lower subsidy compensation to FCI (Rs 1.02 lakh crore versus Rs 1.71 lakh crore provided for) and Oil Marketing Companies as we follow cash basis of accounting for the annual budget.
Measures to Boost Economy Despite Fiscal Challenges
The new FM announced a slew of measures to fix the two levers of the economy –consumption and investment, while also providing relief to banking and real estate sector.
Despite the challenges, the budget projects a fiscal deficit of 3.3 percent versus 3.4 percent presented during the interim budget. All this has been achieved without any cut in expenditure at Rs 27.8 lakh crores. How?
A comparison with the interim budget shows the following:
1. Personal Income tax collection estimates have declined by Rs 51,000 crore
2. GST collection estimates have declined by Rs 98,000 crore
3. The entire personal income tax shortfall is expected to be made up by:
- Increase in customs duty (10,500 crore) and
- Additional excise duty / road and infrastructure cess of Rs 2 each on diesel and petrol (Rs 40,400 crores).
4. Net tax revenue has declined by Rs 55,000 crore. This is expected to be made up by:
- Increase in dividends and profits of Rs 27,400 crore (dividend payout from the RBI has been estimated at Rs 90,000 crore versus Rs 68,000 crore in 2018-19)
- Higher other non-tax revenue of Rs 12,200 crore (details not available)
- Higher disinvestment receipts of Rs 15,000 crore (government has a good track record)
Modi’s Lucky Tryst With Crude Oil Continues
Modi’s lucky tryst with crude oil continues even during his second tenure. In Modi 1.O crude oil price witnessed a massive reduction of more than 50 percent from $105.5/bbl in 2013-14 to $46.2/bbl in 2015-16.
Even though it increased to $69.9/bbl in 2018-19 (last year), it still remained lower than UPA 2 prices. Though, rupee depreciated against the dollar by 16 percent during 2014-2019, Modi 1.0 benefitted from low crude prices which reduced our import bill by roughly Rs 14 lakh crores during the period, directly adding to our GDP. During this period our GDP increased by Rs 78 lakh crores.
While crude oil prices halved, the retail selling prices of petrol and diesel didn’t witness a corresponding decline, in fact they have more or less remained the same. The government used the low-price scenario to raise indirect taxes to fund infrastructure projects. The excise duty on petrol which was Rs 9.5/litre when Modi government came to power, has almost doubled to Rs 17.98/litre currently, resulting in windfall gains of Rs 4.5-5 lakh crore to the government. Excise duty collections have doubled from Rs 1 lakh crores in 2014-15 to Rs 2 lakh crore in 2018-19.
Low Oil Prices Will Push Consumption
As per the Economic Survey presented a day before the budget,
As per research reports, a 10 percent decline in oil prices pushed up the gross domestic product (GDP) growth by 0.3 percent.
Excise Duty on Petroleum Products is Lazynomics
The softening of the global oil prices has provided much-needed relief to the Modi 2.0 regime especially given the lower revenue collections than projected and global headwinds facing the economy. The shoring up of revenues through increase in cess/excise duty on fuel is lazynomics, the government should have thought of other innovative ways to boost revenue collections. While there has been talk of moving the petroleum products under the GST regime, this action virtually rules out such a step. It highlights the short-sightedness of the government.
To sum up, lady luck keeps smiling on Modi and crude oil prices come to the rescue again giving the much-needed breathing space to manage GDP growth, revenues and the fiscal math.
(The author is an independent political commentator and can be reached at @politicalbaaba. This is an opinion piece. The views expressed above are the author’s own.The Quint neither endorses nor is responsible for them.)
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