The decline in crude oil prices after six months of upswing will provide some elbowroom to finance minister Arun Jaitley to manage the macro-numbers. From $63 a barrel in February 2018, crude prices rose to $86 per barrel last month. Then on, the crude prices have plummeted below $70 per barrel by Diwali. If reports are to be believed, crude prices will continue their slide over the next four months owing a to host of global and local factors. From the US exemption to India on crude oil deals to excess pumping by other oil producers may keep crude prices at a modest level. A trend analysis since 2012 portends that oil prices in the second half of the fiscal will be much subdued. Every dollar fall in crude prices will translate to roughly a saving of $1 billion in the import bill.
The current account deficit (CAD) that threatened to cross 3 per cent this year may be reined in at 2.3 per cent to 2.6 per cent, a more healthy range that would be manageable. The moderation in oil prices is bound to have a salutary impact on inflation and retail prices. If trend analysis by several economists is anything to go by, retail inflation may be well within 4 per cent by March 2019. It also means that prices may not be a concern for consumers thereby giving enough fiscal space for Jaitley to operate in the market. Continued deceleration in food prices in both rural and urban markets will make Jaitley’s task that much easier in putting together a pre-election budget.
In fact, modest crude oil prices and firming up of rupee gives credence to government argument that it was not eyeing Rs 3,30,000 crore reserves of the Reserve Bank of India (RBI) to bridge the fiscal deficit. The Centre’s assertion that it would be able to compress the fiscal deficit at 3.3 per cent may have an element of truth. In fact, the government had unilaterally lowered its borrowings for this financial year by Rs 70,000 crore given its comfort level on the fiscal front. Otherwise, how does one explain the cut in the goods and services tax (GST) rates of over 330 items?
A key issue in managing reserves with the RBI cannot be brushed aside. However, tapping these reserves should be the last option for any finance minister. Both the RBI and the finance ministry will have to evolve a sustainable, long term framework on putting reserves to more productive use, especially in the creation of high yielding capital assets within and outside the country. For example, leveraging the RBI reserves to create a dedicated infrastructure fund to finance projects with long gestation is an idea that has been worked upon for long. At least $100 billion infrastructure fund with participation from both domestic and foreign players – private and state-owned – could be a starting point for supporting seaports and airports development
Secondly, reserves with the RBI may have to be utilised for strategic energy assets internationally that would help the finance minister buffer the volatility in crude oil market internationally. Creating 60-days’ crude reserves is a project that needs to be worked on by the government. Thirdly, the RBI reserves will have to be deployed for making strategic investments internationally.