Rs 1 lakh cr gain from lower oil, higher tax mop-up; govt readying for a splurge

The Opposition may try and block every planned reforms of the NDA government, but there is one thing that they can do nothing about - luck, in the form of lower crude oil prices. Last year, if it was a fight for market dominance between the Opec and the US, this year it is the Iran nuclear deal that is keeping the oil prices down and helping the government get a larger legroom for spending. And the development took place at a time when the economists and experts have been ruing about the lack of enough government spending to kick-start the economy and to offset the reluctance by the private sector to invest. While the government has so far taken a calibrated approach in its overall spending given its own weak finances, looks like the government is finally making efforts to boost infra spending and social-sector schemes in the remaining period of the current financial year. [caption id=“attachment_2358762” align=“alignleft” width=“380”] Reuters[/caption] A report in the Business Standard today said the government is likely to reap in an extra Rs 1 lakh crore in savings benefiting from lower crude oil price and increase in indirect tax collections, which will help it boost the spending. In the Budget for 2015-16, the government has budgeted a spending of Rs 17.77 lakh crore, including planned and non-planned. According to the BS report, reduced subsidy burden on oil & gas companies and fertiliser firms as crude prices stay around $70 a barrel will allow the government to use the savings towards infrastructure spending, social-sector schemes and balancing its fiscal maths. “The situation is comfortable this year and we have a lot of fiscal breathing space. We expect savings on the subsidy side, primarily due to (low) oil prices. The budgeted spending targets will surely be met. We may even exceed those,” the BS report quoted a senior government official as saying. The crude prices have remained benign this year due to much-talked-about fight for dominance between Saudi Arabi and the shale gas producers in the US. Following the recent nuclear deal signed by 6 super powers with Iran, expectations are that Iran will increase supply of crude and the prices will remain lower for an extended period of time. India Ratings and Research in a recent report said the Iran pact will lower insurance and transportation costs, reducing the overall landed cost of Iranian oil in India. Lowering of crude oil prices will contribute positively to the India economy, across the oil and gas value chain barring domestic upstream players. A decline in oil prices could lower LNG prices as the two are linked and this is likely to benefit end-consumer industries such as fertiliser and petrochemicals, the report said. Oil prices have been comfortably below the $70-a-barrel level when the Union Budget for this year was prepared. Besides this, increase in tax buoyancy following a 37 percent rise in indirect tax collections to Rs 1.54 lakh crore in April-June period from the Rs 1.2 lakh crore in the year-ago period will also give the government enough head-room to boost spending. In April-May, total expenditure of the government stood at Rs 2.62 lakh crore or 14.8 percent of the entire year estimates. But, a closer look at the expenditure pattern shows there isn’t any sharp increase in spending. While the plan expenditure has gone up from Rs 59,609 crore to Rs 62,106 crore, the non-plan spending has declined to Rs 2 lakh crore from Rs 2.2 lakh crore. Hence, the net increase in spending year-on-year in the first two months of fiscal year 2016 is about Rs 2,500 crore. However, the Business Standard report said the Centre’s capital expenditure in the first half of the current financial year is likely to rise a little more than 25 percent over a year ago, to Rs 1.25 lakh crore, the highest ever for April-September in any year. The infrastructure and energy ministries have been told to spend most of their capital expenditure in the first six months of the year, with a promise they will be provided more under the supplementary demand for grants in the winter session of Parliament, if need be. The benefits of falling crude prices are already showing in with reduced subsidy payments on fuel, food and fertiliser. The total combined major subsidies for the first two months of the current year were around Rs 49,557 crore. That is 30 percent less than the Rs 71,250 crore in major subsidy outlays for April and May of 2014-15. With the government assured of a bountifull from lower oil prices and high tax mop-up, one would hope for increased spending on infra and social-sector schemes to pick up momentum immediately.