Blog # 972 : Consumers Least Benefitted from $47 Billion Oil Windfall

India has been one of the biggest beneficiaries of the dramatic collapse in crude oil prices, which hit an 11-year low of $36 per barrel this week. Global crude prices have crashed nearly 70 per cent from their peak of $115 per barrel in June 2014, leading to windfall gains for the government. Morgan Stanley on Tuesday put out a report to show how the domestic economy has benefitted from the fall in global crude prices.

1) India's annual oil import bill has fallen from $108 billion in 2012 to $61 billion in 2015, leading to savings of $47 billion, according to Morgan Stanley. In local currency, the total savings so far is a little over Rs 3 lakh crore (at 65 rupees per dollar).

2) The central government is the biggest beneficiary with total savings estimated at $27 billion, the investment bank says. Oil subsidy payments are likely to be just 0.2 per cent of GDP in 2015-16 as compared to 1 per cent in 2012-13, leading to savings of $14 billion for the central government, according to Morgan Stanley. This drastic fall in subsidy payments will help the government meet its 3.9 per cent fiscal deficit target this year.

3) The central government has also been able to generate $14 billion in revenues since November 2014 by hiking excise duty on petrol and diesel, says Morgan Stanley. This additional revenue will help the government offset the shortfall in direct tax collections. It will also help the government allocate more funds towards capital expenditure, which will boost economic growth.
4) The corporate sector, which uses oil as ingredients/raw materials, is estimated to have saved $12 billion from the fall in oil prices. This amount includes savings of state-run oil firms that will have to contribute substantially less towards the government's oil subsidy bill.

5) Consumers have been least benefitted: Households are estimated to have saved just $8 billion on account of the slump in oil prices, Morgan Stanley says. Consumers have saved mainly because of reduction in retail prices of petrol and diesel (including tax), which have fallen by Rs14/litre and Rs13.5/litre, respectively, since mid-2014.

"If oil prices were to remain at $40/barrel over the next 12 months, net oil import bill would decline further to nearly 1.9 per cent of GDP (for 2016)," said Chetan Ahya of Morgan Stanley.

That translates into addition saving of $23 billion during the next year, which will take the total saving over the two-year period ending December 2016 to $70 billion, the investment bank added.