Jaitley’s only legacy would be rising petrol prices and the falling rupee

Finance Minister Arun Jaitley has always been a very effective spokesperson for the Bhartiya Janata Party but running the Finance Ministry hasn’t really been his game. As he enters the last seven months of his eventful term in office, speculation is rife if Petrol would beat the Dollar to score its maiden century. That, sadly, is the legacy he leaves behind.

Forecasts suggest the Dollar is expected to touch Rs 74 and crude oil prices are expected to be touching $100 a barrel by May 2019, indicating that Petrol is expected to get its century first.  The ‘Naseebwala’ days are over as the government has been hit by the double whammy of rising crude and falling Rupee. The government needs oil revenues to keep itself afloat and does not have the fiscal space to work itself out of the mess that it has dug itself into. The result, we are going to hear less economics and more rhetoric in the run up to the 2019 elections.

Petrol and Diesel prices have come into the record-breaking zone and while middle class Indians continue to suffer, the government is doing the only thing it can do, pray for the prices to come down. Petrol price in Delhi were at Rs 69.71 a year ago, on September 5, 2017 which has grown to Rs 79.4 per liter now. A jump of Rs 10 over a year could be justified by a 40% rise in crude prices but that is only a part of the story.

As things stand today, Brent crude prices are hovering around 77 dollars to a barrel, rising steadily since April 2018 when crude was around 67 dollars. While the 70-75 dollars to a barrel range is being considered the new normal, this figure is enough to cause serious problems for the government. It will have to grin and bear all the attacks because it does not have the fiscal room to cut excise on petrol and other petroleum products.

The government had reduced Excise duty of petroleum products by Rs two in October last year but crude prices were below $60 a barrel. Reducing Excise duties further is simply not possible as Moody’s estimated a revenue loss of Rs 13,000 crore for every Rupee lost in excise revenue. The government would have to cut expenditure to keep fiscal deficit under check but that does seem to be an option as it will bring down growth numbers, a disaster the BJP would like to avoid so close to the election.

Mr Jaitley has been asked the question before and he has stated categorically that such a move will  push India into an ‘unmanageable debt.’ The Finance Minister has clearly indicated that he needs oil taxes to run the government and any reduction in Excise would clearly spell doom. The BJP government is presently charging Rs 19.48 per liter as Excise on a liter of petrol while Arvind Kejriwal-led AAP government charges Rs 16.83 per liter as VAT.

The government would have been able to handle its finances and criticism over high taxes if crude was in the $75-80 range but with Rupee in almost a free fall, it has pushed the government’s fiscal and headline management skills to the edge. The Dollar was at Rs 58.29 when the BJP government took office and has lost 23% of its value, sliding to Rs 71.75, after breaching the Rs 72 mark. The rise has been very stark in the last one month as the Dollar has appreciated by Rs 3.42 over the last month alone.

While decline in the value of the Rupee has been fueled by rising crude prices, the import bill has been going up as coal imports have gone up by 45% besides a 44% jump in semi-precious stones and a 47% cent jump in metal and mineral ores. Our exports are flat and this has led to a situation where trade deficit for July 2018 is $18.02 billion against $11.45 billion during July 2017. The more our trade deficit rises, the more pressure the Rupee is going face.

The forecast does not look very good either. The Rupee is expected to be around Rs 74 to a dollar by May 2019 and crude is expected to closer to $100 a barrel by the time the Modi government goes for their re-election in May 2019. If these forecasts hold and petrol does breach the Rs 100 per liter mark, the people of Delhi would be paying 55% extra for petrol. The UPA government had sold petrol at Rs 64.47 per liter when they demitted office.

The BJP-led NDA government now has a difficult choice to make. Continue extracting 19.48 per liter and tax the last penny out of the middle class or sacrifice taxes and risk a slowdown. The Naseebwala seems to be running out of luck.