What is the impact of the rise in oil prices on public finances?

New Delhi: Crude oil prices rose amid growing geopolitical tensions between Russia and Ukraine and tensions in the Middle East. On Thursday, the price of crude oil crossed the $90 per barrel mark for the first time since 2014.Read also – The budget session should start from January 31: what is zero hour, question time | Explain

According to a report by Indian Express, some experts believe that prices could soon hit the $100-$110 per barrel mark. This is mainly due to supply bottlenecks and growing demand as economies begin to open up. Interestingly, on December 2, 2021, the price per barrel was $65.88. Read also – Budget 2022: No question, zero hours on budget day

This price increase puts a lot of pressure on governments. Much of the government’s revenue comes from taxes on oil prices, but that also puts them in a tough spot due to ever-increasing demand. For India, this is all the more important as Finance Minister Nirmala Sitharaman will present the 2022 budget on February 1. Also Read – Budget 2022: What do consumer tech companies expect from the next budget?

What is the impact of oil prices on public finances?

Since the start of the Covid-19 pandemic, oil prices have continuously followed an upward trajectory. However, with Omicron, the demand for fuel has not diminished. According to the report, the government expected oil prices to remain near $65 to $70 a barrel. But most of the time this year, oil prices have stayed above that mark.

This has the following impacts on the budget:

  1. Higher inflation: Rising oil prices have a direct impact on inflation figures. India’s retail inflation or consumer price index (CPI) already hit 5.5% in December. This is the highest in five months. On the other hand, the wholesale price index (WPI) reached 13.56%. This rise in inflation pushes the government to reduce oil taxes, leading to lower revenues.
  2. Petroleum subsidy, LPG: After cutting revenues, it becomes difficult for the government to pay subsidies on LPG and kerosene. It also impacts the lower middle class and the BPL part of the country’s population.
  3. Balance of payments imbalance: India imports more than 85% of its oil needs. If prices rise, the government’s oil bill also rises. With the high inflation figures, the government cannot increase the excise duty on petrol and diesel any further. This can lead to a balance of payments (BoP) imbalance, which becomes a big problem in the budget.
  4. Low tax collection: With rising oil prices, the government may need to reduce excise duties and VAT on petrol and diesel. This prevents oil marketing companies from raising gasoline and diesel prices. But this comes at a high cost as thousands of crores are wiped from government coffers.

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