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The Crude Oil Prices have steadily increased over the past decade.
AGGREGATE DEMAND
Aggregate Demand
Aggregate Demand
In Rupee terms Imports have increased reducing the Net Exports (X) component of aggregate demand.
Affects the Cost of Production Diesel Trucks and Railways, fertilizers and pesticides for agriculture, plastic-manufacturing Major Contributor to Cost Push Inflation Prices of Products are partially increased to Offset production costs
High Inflation with negative sentiments to future prices led to decrease in household consumption
Private Investment has reduced due negative business expectations due to Decreasing Aggregate Demand Persistently high interest rates
Reduction in GDP growth rate -higher unemployment levels Cost-Push Inflation has hit the BOP hardest
Situation of Stagflation
RBI had hiked the Repo Rate 13 times along with CRR hikes Fight inflation by sucking the liquidity in the market
Fuel and Food major contributors to inflation With supply side constraints, the impact of monetary policy is minimal Cost-Push policy can be countered as reducing demands will force the manufacturers to reduce the mark-up to increase the demands
The three broad channels through which the international oil prices have a deep impact on the economy are a) Import Channel b) Price Channel c) Fiscal Channel Import Channel:
India is a Net Importing Country Susceptible to foreign bill variations Rise in Oil prices means real growth reduces The Compression in aggregate Demand dampens the Growth
Price Channel
Price channel is indicated by the link from international oil prices to increase in administered prices to WPI inflation The objectives for regulation of price of oil have been three-fold: To protect the domestic economy from volatility in international oil prices To provide merit goods to all households, To protect poor consumers so that they may obtain kerosene (through PDS) and LPG at affordable
If the administered price of crude oil, gas and petroleum increase by 7 per cent, The overall WPI increases by 1 per cent (i.e. the total elasticity to be 0.14) 10% increase in Global Prices 1 %point increase in WPI and 2% over time
Fiscal Channel
Absence of a complete pass-through, an international oil price increase will raise the subsidy on oil
Increase the revenue expenditure of the government
Oil prices though subsidized also generate revenue for both state and centre A rise in international oil prices affects the tax collected The Tax Collections should however rise to result into a net addition into the subsidy
2.8 % of the GDP Over 60% of State Exchequer 3 years Tax contribution has been higher than the subsidies provided by the government
The table shows: Price of all products except kerosene are higher than international market
Taxes are close to 50% of retail price More than 50% of taxes are collected in form of Excise
The table above shows the projected consumption by 2020-21 and 2030-31 The two assumptions made in Kirit Parekh Report (2010)
The average annual compound growth rates of petrol diesel kerosene LPG during 2002-3 to 2008-09 will apply to 2020-21 & 2030-31 The Current Level of prices set by government will continue
At price of $80/barrel , the total under-recoveries work out to Rs.157,000 Crore by 2021
At 25% increase to $100/Barrel , under-recoveries increase by 77% At 50% increase to $120/barrel, under-recoveries increase by 155%
The Figure below represents under-recoveries of OMCs on sale of petrol diesel LPG and PDS Kerosene
These estimates reveal the share Diesel in Under-Recoveries and is Projected to Increase from 45% of Crude to 58% at $150/barrel by 2020-21
Significant impact on oil companies, notably the upstream national oil companies They are currently shouldering the majority of the nongovernment burden On Elimination , money would allow the companies to be properly and fairly financed One way to finance part of the under-recoveries is to levy a windfall profit tax on all upstream companies who were allotted blocks on nomination basis The Chaturvedi Committee has suggested a special oil tax on domestic producers of crude oil on pre-NELP leases 100% from a price level of $75/bbl so as to manage the huge under-recoveries estimated for 2008-09.
Conclusion
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