Saturday, Oct 08, 2022
Outlook Business

How Government Stands To Lose Up To Rs 1 Trillion Amid Russia-Ukraine Conflict

Amid the escalations, edible oil prices are also likely to go up after Russian President Vladimir Putin launched military operation in Ukraine.

Crude oil

Brent crude has hit $105 a barrel, the highest in almost eight years after Russia ordered strikes on Ukraine.

Finance Minister Nirmala Sitharaman on Tuesday said rising crude oil prices amid escalating Ukraine-Russia tensions pose threat to India's financial stability and the government is closely monitoring the situation.

Amid the escalations, edible oil prices are also likely to go up after Russian President Vladimir Putin launched a military operation in Ukraine.

India imports around 90 per cent of sunflower oil from Russia and Ukraine, hence, the crisis is likely to impact prices and supply in the country.

Other commodities which will see inflation include precious metals gold, palladium, and platinum

This is likely to make a dent in the central government's coffers and 

The latest report by the State Bank of India's (SBI) economic wing says the government is likely to lose up to Rs 1 trillion amid rising oil prices in FY23.

Based on the existing value-added tax (VAT) structure and taking Brent crude price of $100 - $110 per barrel, diesel and petrol prices should have been higher by Rs 9-14 than the current price, the report said.

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 an excise duty loss of Rs 8,000 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 trillion for FY23, wrote Soumya Kanti Ghosh, group chief economic adviser State Bank of India in the report.

The price hike will impact the Current Account Deficit and domestic inflation.

Analysts expect oil marketing companies (OMCs) to raise prices of retail fuel with their marketing margins squeezed. Oil marketing companies in India haven’t revised petrol and diesel prices for more than 110 days.

Ukraine being an important exporter of agricultural products, there will be an impact on prices of wheat and corn if navigation lines in the Black Sea are disturbed.

Now the question arises how much time crude oil will take to cool down. Historical trends (since 2018) indicate that it takes around 18 months for crude prices to crash by as much as 67% from the highest level and a 30% drop from the highest level could even come in 3 months.

Meanwhile, the average price of the Indian basket of crude oil has risen to $84.67/bbl in Jan’22 from $63.4/bbl in Apr’21, a 33.5% increase, the report said.  

If the crude oil price rises to an average of $100/bbl. from the current average, inflation is likely to increase by 52-65 bps, according to the report.