What does the fall in crude oil price mean for India's economy? (Part 9 of 12)
Fiscal deficit
The difference between a government’s revenues—without including borrowings—and expenditures shows its financial situation. If expenditures exceed revenues, then there is a deficit—else a surplus is reported. For more information on India’s fiscal deficit, read Why are there fiscal and revenue deficits in India?
India’s state
Fiscal deficit has been plaguing India’s economy for a long time. Previous governments’ efforts to reduce the deficit to zero were nullified by the global economic crisis. The crisis caused the government to take stimulus measures. This increased expenditures. It decreased revenues. Also, it increased the deficit manifold. As of fiscal year 2014—April to March—the fiscal deficit was 4.5% of the GDP (gross domestic product). The current government intends to bring it down to 4.1% of the GDP in fiscal year 2015.
Impact of crude oil prices
Lower crude prices would reduce the government’s expenditure. It subsidizes petroleum products—like kerosene, fertilizers, and LPG (liquefied petroleum gas). The budgeted estimate for crude oil prices is $105–$110 per barrel. With petroleum and fertilizer subsidies standing at 634.3 billion rupees and 729.7 billion rupees, respectively, soft crude oil prices will help reduce the value of these subsidies. Soft crude oil prices will also help reduce the government’s fiscal deficit.
Excise duty hike
Due to over-recoveries, or profits, by government-owned oil marketing companies, the government raised the excise duty on gasoline and diesel. The hike occurred twice—first on November 13 and then on December 2. This hike wasn’t passed on to consumers. However, the government would make ~105 billion rupees in additional revenues. This was possible because of a fall in global crude oil prices.
A fall in the fiscal deficit will increase economic growth. This should positively impact Indian ETFs—like the WisdomTree India Earnings Fund (EPI), the PowerShares India Portfolio (PIN), and the iShares MSCI India ETF (INDA). ETFs that have a decent exposure to India should also benefit—like the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM).
Apart from the fiscal deficit, India’s trade deficit will also be impacted. In the next part of this series, we’ll discuss India’s trade deficit.
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