"Benefits from the fall in oil prices would reflect in the budget through lower oil subsidies and higher tax projections next year," a senior government official said.
Finance Minister Arun Jaitley could reap a fiscal windfall of at least US $12 billion when he presents his 2015/16 budget in February with a plunge of nearly half in oil prices, two government sources told Reuters.
The savings would come in the form of reduced fuel subsidy costs and higher excise duties on petrol and diesel, the sources said. In addition, finance ministry officials have proposed restoring an import duty on crude oil that was scrapped in 2011.
As a result, the government would claw back most of the money that the country saves on oil imports, which would help Jaitley hit borrowing targets but dilute any boost to consumption in the domestic economy.
The energy-hungry country imports around 4 million barrels of oil per day and the net cost of oil imports, based on a budgeted oil price of US $105 per barrel, is expected to total US $88 billion in the financial year to March 31, 2016.
Officials drawing up the finance minister's first full-year Budget are pencilling in a view that oil prices will average US $65-US $70 in the 2015-16 fiscal, cutting the national import bill by US $18 billion (or 0.9 per cent of GDP), they reckon.
"Benefits from the fall in oil prices would reflect in the budget through lower oil subsidies and higher tax projections next year," a senior finance ministry official told Reuters.
The sources estimate that the overall fiscal boost can total Rs 75,000 crore (US $12 billion), of which more than half, Rs 40,000 crore, would come from savings on oil subsidies.
TAX AND DON'T SPEND
Prime Minister Narendra Modi, who came to power in May with a landslide election victory, has deregulated the price of diesel, which account for 40 per cent of consumption of refined fuels.
Taking advantage of the resulting fall in pump prices, The Modi-led government has raised excise duties on petrol and diesel twice in November. That means state coffers, and not drivers, will benefit to the tune of US $1.6 billion in the ongoing financial year and nearly US $5 billion in FY16.
A revival in the profitability of state-owned oil refiners like Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOC) could generate another US $1 billion in additional revenues.
Further, ministry officials recommend restoring the old 5 per cent crude oil import duty in full. This would require the prime minister's approval, and if implemented could raise up to US $4 billion more revenue, lifting total potential fiscal gains to over US $16 billion.
"A proposal to impose import duty on crude oil is under consideration," said another finance ministry source. "The final decision could be announced in the budget," he added.
Both sources requested anonymity, because they were not authorised to speak to the press on the record.
Jaitley is struggling to hit te government's fiscal deficit target of 4.1 per cent of gross domestic product in FY15. The finance minister wants to cut it to 3.6 per cent in 2015-16, and 3 per cent in the 2016-17 fiscal.
Fiscal constraints leave little over for the wider economy, with consumers still cautious about their prospects and concerned that recent falls in inflation will be only temporary.
Although the price of diesel, used by truckers and farmers, has fallen by 6 percent in the past five months, drivers in te country are now paying more to fill up than in the United States.
"The boost to household consumption is likely to be small," said Shilan Shah, India Economist at Capital Economics in London, adding, "The government has been able to take advantage of the windfall."
By Shah's reckoning, the oil windfall could help cut the budget deficit by 0.5 per cent of GDP, while narrowing the current account deficit and easing price pressures.
"This could lead to the RBI (Reserve Bank of India) beginning to cut interest rates early next year, which on its own should have impact on economic growth," said Shah.