Petrol, diesel prices: How PMO can douse raging fuel rate fire; 3 options to big relief for public

With the ongoing hikes in petrol and diesel prices refusing to end, the ball is squarely in Prime Minister Narendra Modi's court and he will hav to take the final call on providing relief on these products soon. Notably, some ministers have said the issue is being actively mulled by the authorities at the highest levels. The rise in fuel prices have been the outcome of higher global crude prices,  which have soared to near $80 per barrel and depreciating Indian currency against US benchmark dollar index. Following these two indicators, the public can only reach out to government to relax the taxes levied on these products. OMCs like HPCL, IOCL and BPCL take into consideration the international crude oil prices, government’s excise duty and various state's Value Added Tax (VAT) to derive the final retail prices of fuel products including petrol and diesel. Of course, government also has to keep in mind that the state of economy is not harmed by doling out subsidies, which is essentially what ordering a price rise halt means and this can boost deficits to unacceptable levels.

On Saturday, petrol price in New Delhi was at Rs 77.97 per litre, in Mumbai at Rs 85.78 per litre, in Kolkata at Rs 80.61 per litre and in Chennai at Rs 80.95 per litre. 

Whereas, diesel price stood at Rs 68.90 per litre in New Delhi, Rs 71.45 per litre in Kolkata, Rs 73.36 per litre in Mumbai and Rs 72.74 per litre in Chennai. 

Thus, from May 14 till today, petrol prices have risen by Rs 3.30 per litre in Mumbai and Rs 3.29 per litre in Kolkata, whereas Delhi had a slightly higher hike by Rs 3.34 per litre and Chennai the most by Rs 3.52 per litre. At the same time, diesel prices have risen by Rs 2.97 per litre each in New Delhi and Rs 2.82 per litre in Kolkata. Mumbai and Chennai saw the most hikes - by as much as Rs 3.16 per litre and Rs 3.18 per litre respectively. 

So, on rate hikes, Dayanand Mittal and Krishanchandra Parwani, analysts at SBICap Securities, said, “We believe the government may do this through a combination of the following: a) ask states to reduce VAT – we believe this is likely as states made a windfall gain of Rs2/ltr along with the rise in crude prices due to the advalorem duty structure; b) reduce central excise duty – this could be a nominal Rs1-2/ltr, more to win back the political narrative; and c) nudge OMCs to be more discretionary on pricing, which could impact the near-term marketing margin – this could be the worst-case scenario for OMCs but its probability is low.”

Below mentioned are the few key pointers highlighted by SBICap Securities, which can be part of government’s decision in fuel prices. 

State's VAT

VAT on diesel/gasoline in Delhi has risen by ~Rs2/ltr in the last 2 years, along with the rise in crude price, due to the advalorem duty structure. 

The duo said, “We believe the government is likely to push states to cut VAT to pass on their windfall gain. In the last 6 months, four BJP-ruled states have reduced VAT by 1-4%; we believe more states, particularly BJP-ruled states and those where elections are due in the next 1 year, may follow suit.” 

Nominal excise duty cut likely

The analysts, “With no elections scheduled over the next 6 months, we believe there is the possibility of only a nominal Rs1-2/ltr excise duty cut now more to win back the political narrative. The government may want to retain the optionality of significantly slashing excise duty (once there is greater clarity on GST revenue) closer to the elections.” 

In past 4 years, the net increase in excise duty is Rs 11.8 per litre  on diesel and Rs10 per litre on gasoline. It must be noted that this “incremental” excise duty can absorb $20-25 per barrel rise in crude price.

Pause in hike 

A temporary pause in diesel/gasoline price hike is the worst-case scenario, as per the analysts, because the  of this is low, but it is likely to lead to near-term pain for OMCs if the government goes ahead and does it. 

Also, OMCs are likely to continue to be exempted from the subsidy burden, and upstream PSUs will bear the excess under-recoveries (equivalent to their windfall gain). Further, the crude price is likely be capped ahead of OPEC’s 22 Jun’18 meet wherein the grouping is likely to consider raising output due to concerns over Iran and Venezuela’s output.

Therefore, the duo added, “We agree that OMCs run a risk from a sustained rise in crude prices to +US$90/bbl during an election-packed year.” 

From the above, it would be keenly watched on what government decides for relaxing fuel prices in India.