[T.S.R:17087] Citi-Higher Crude Will Cripple India's Finances

Citibank

Will Oil Cripple India's Finances? What Do Higher Oil Prices Mean for India

India's Energy Profile:

India's current energy requirements are estimated at ~400mtoe. In order to sustain growth at current levels, studies indicate that India would need to increase its primary energy supply to 1,651mtoe in the next two decades. Currently, coal meets more than half of India's energy needs, oil accounts for close to 30%, while natural gas, lignite and hydro power make up the balance. While coal resources are abundant, oil is not. As the fourth largest consumer of oil in the world most of India's oil energy needs are met through imports, making it is the world's 5th largest oil- importing nation.

Impact on the BoP: India imports 80% of its crude oil requirements, with oil comprising over 30% of its import bill. Taking into account petro product exports, a US$1/bbl increase in oil prices would increase the trade deficit by US$800m. Our FY12 estimates incorporate the Indian basket averaging US$105/bbl, resulting in a current a/c deficit (CAD) of US$59.5bn (3% of GDP). With the budget easing funding availability on the capital account, we expect flows to be sufficient to finance the CAD and maintain our view of the currency trading in the Rs45-46 range.

Impact on the Fiscal Position: Absence of deregulation in diesel and cooking fuels has resulted in rising losses for oil marketing companies. A US$1/bbl increase in oil prices results in gross under recoveries rising by US$700m. With oil at US$105/bbl and assuming no deregulation, estimate under-recoveries are likely to rise to Rs1.4trn. Further, assuming the continuation of the subsidy sharing framework (i.e the govt's share is 50% of total losses), the subsidy burden could rise to Rs 688 bn. 

Impact on Inflation:

The impact is a bit difficult to quantify though prices of petrol and industrial fuels are market determined, the price adjustment at times takes place with a lag, while the government regulates prices of cooking fuels as well as diesel. However, statistically, the impact on inflation could range from 0.68% to 3.4% depending on how it is transmitted. Key to look out for is de-regulation of diesel, but given upcoming state elections this could be delayed.

The budget arithmetic is based on nominal GDP growth of 14%, gross tax revenues rising 18.5%, and expenditure rising 3.4%. While the revenue and growth assumptions appear realistic, the expenditure numbers appear optimistic. Overall expenditures are expected to rise by just 3.4%. 

On the back of continued political upheaval in the MENA region and assuming that output disruption continues through 2Q11, our global Oil and Gas team recently revised Brent Crude forecasts for 2011 and 2012 to US$105/bbl and US$100/bbl respectively, from US$90/bbl estimated earlier.

What Does This Mean for Our Forecasts?

Incorporating higher oil prices as well as recent trade data, we have made several revisions to our BOP forecasts: Given the current run-rate in exports ( Apr-Feb FY11 average at 30.5%) we are raising our FY11 export estimate to US$229.6bn or 26%YoY from 15%YoY earlier. Factoring in FY12 growth at 19%, exports in absolute terms would rise to US$273bn from US$252bn earlier.

On the import front, we are nudging our FY12 forecasts to US$435bn or 22.5%YoY, from US$422bn earlier (+19%). This incorporates (a) Oil imports rising by 35% vs. 15% earlier (b) Non-oil imports rising by 18% (20% earlier).

Factoring in invisibles at US$102bn (slightly lower than our previous forecast due to a moderation in remittances), we expect the CAD to come in at US$59.5bn from US$65bn earlier, or 3% of GDP.

Gas Gains Lower than Earlier Envisaged

With higher oil prices weighing on the trade deficit, a key factor to look at is the gas discoveries that could impact the net oil import bill. On this front, while our oil analysts initially expected gas production to be higher due to Reliance¡¦s KG Gas Basin discoveries coming on stream (64mmscmd in FY12 and 80mmscmd in FY13), they recently revised forecasts down to 55mmscmd and 64mmscmd respectively.  

Although the RIL BP deal could potentially advance KG gas ramp-up timelines, lack of clarity and production levels remaining stagnant in the foreseeable future are a key reason behind the revision.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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